How Credit Lending Works: From Borrowers to Factoring and ABS Explained
This article provides a comprehensive overview of credit lending, detailing the roles of borrowers, platforms, and funders, exploring B‑ and C‑side market scenarios, various cooperation and financing models such as self‑operated loans, assisted lending, joint lending, factoring, bill discounting, and receivable‑backed securities, while also addressing associated risks and mitigation strategies.
01 From Participants View
Credit lending typically involves three participants: borrowers, financial platforms, and fund providers.
1.1 Borrowers can be individuals or enterprises seeking quick funds, such as when applying for mortgages or auto loans.
1.2 Financial Platforms act as intermediaries connecting borrowers with funders, earning interest and fees; examples include banks, Alipay’s Huabei, JD Baitiao, etc.
1.3 Fund Providers supply the capital for loans, e.g., China Merchants Bank, Construction Bank, CITIC Prudential.
02 From User Scenarios View
Credit markets are divided into B‑side (enterprise) and C‑side (consumer) scenarios.
2.1 B‑side Financial Market serves corporate clients with products such as corporate loans, supply‑chain financing, commercial real‑estate loans, and trade financing.
Corporate loans: short‑term and long‑term for operations, equipment, expansion.
Supply‑chain financing: optimizes supply‑chain management.
Commercial real‑estate loans: purchase, renovation, development.
Trade financing: supports import‑export activities, e.g., letters of credit, factoring.
2.2 C‑side Financial Market targets individual consumers with products like personal loans, credit cards, mortgages, auto loans, and installment products such as Huabei and JD Baitiao.
2.3 B‑side vs C‑side Comparison compares market size, risk control, credit limits, repayment cycles, and fees.
03 From Cooperation Model View
Cooperation models include self‑operated loans, assisted lending, and joint lending.
3.1 Self‑operated means the platform provides its own capital to issue loans, requiring appropriate licensing and subject to regulatory limits on capital usage.
3.2 Assisted Lending the platform acts as an intermediary, helping borrowers and funders connect, handling customer acquisition and risk control.
3.3 Joint Lending multiple lenders share a loan to a single borrower, distributing risk and pooling resources.
Risk diversification.
Resource sharing (risk models, customer data).
Meeting large financing needs.
04 From Financing Model View
Borrowers and platforms mainly use three financing modes: credit loans, factoring, and bill discounting.
4.1 Credit Loans
Loans based on credit, including credit cards, Huabei, Jiabei, mortgages, auto loans, education loans, and corporate flow loans.
4.1.1 Origin of Credit Cards Traces the invention of the credit card from a New York restaurateur’s forgotten wallet to the modern Visa and MasterCard systems.
4.1.2 Credit Card Risks include credit risk, fraud risk, professional loan‑user risk, and “reward‑chasing” behavior.
4.1.3 Risk Mitigation involves credit‑loan management systems, credit reporting, and intelligent risk control models.
4.2 Factoring
Enterprises can obtain financing by selling their accounts receivable to a factoring company.
The process includes agreement signing, fund advance (typically 90% of receivable), fee payment, collection at maturity, and settlement of any differences.
4.3 Bill Discounting
Bill discounting converts a bank or commercial bill into cash before maturity.
The supplier submits the bill, the bank applies a discount rate (e.g., 7% annual), and provides cash after deducting the discount fee.
05 From Re‑Financing Model View
Re‑financing aims to quickly obtain cash and improve returns for platforms.
5.1 Re‑Factoring
Factoring companies can sell their acquired receivables to other factorers to raise liquidity.
The initial factor sells receivables at 90% to Factor A; Factor A then sells them at 80% to Factor B, resulting in cash flows and profit differentials for each party.
5.2 Receivable‑Backed ABS
Large pools of receivables can be packaged into asset‑backed securities (ABS) to raise capital.
The ABS are issued via a special purpose vehicle (SPV), sold to investors, and generate cash for the factoring company while providing investors with interest returns.
5.3 Overseas Financing
Cross‑border financing introduces currency conversion considerations, such as “wrong‑currency withdrawal” to manage exchange‑rate costs.
Chen Tian Universe
Chen Tian Universe, payment architect specializing in domestic payments, global cross‑border clearing, core banking, and digital payment scenarios. Notable works: “Ten‑Thousand‑Word: Fundamentals of International Payment Clearing”, “35,000‑Word: Core Payment Systems”, “19,000‑Word: Payment Clearing Ecosystem”, “88 Diagrams: Connecting Payment Clearing”, etc.
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