A Brief Insight On Lending And Types Of Lenders

by Sandeep M. Tour and travel

Money lending is also known as "financing." If you take it in the most literal sense it simply means a person giving money to another person temporarily to meet with their financial needs. The other implications of this process and features are:

  •          The person who gives the money is called the ‘creditor’
  •         The person who receives the money is called the ‘debtor’ or more commonly the borrower
  •       The creditor gives the money in good faith with an expectation that it will be repaid
  •      There is a stipulated time for repayment as determined and agreed by both the creditor and the debtor
  •     The creditor will charge as additional amount on the loan as interest which is actually the income of the creditor and the money you pay for the privilege
  •      The rate of interest can be varied as per the type of loan and it can be either fixed or variable.

You are legally bound to repay the money with interest and in case of default the creditor has the legal right to do whatever mentioned in the loan agreement in order to recover the dues from you.  

In a financial context, money lending is the most significant aspect of the money market and is the backbone of a nation’s economy. As per the business context is concerned, money lending and borrowing is the same credit transaction but from the two different standpoints.

About the lender

Lenders can be any business, bank or financial institutions and even private individuals and non-bank organizations that lend money such as the likes of and others. No matter whomever you borrow the money from you will have to pay an interest which is ideally the cost of the loan.

  • This cost of loan may vary from one type of lender to another and will also depend on the amount of risk of being paid back. Therefore, it is advised that you shop around first before you choose a type of lender and a type of loan to take out.
  •  Usually lenders charge a higher interest when they lend money to a business, especially a new startup business because of the high risk involved in it. It is even seen that most money lenders do not give any loans to small businesses.
  • Lenders usually do not participate in your business if they offer a business loan. They do not even put on any restrictions in the way you use the money especially if you take on a personal loan.
  • However for specific type of loans such as home loans, auto loans, medical loans and others they make sure that the money reaches to the person you owe the money. In such types of loans the money you borrow is usually send directly to the accounts of the person you owe the money instead of remitting it to your account as is in the case of a personal loan.

On case of a business loan, though the lenders do not participate in the business operation in the same way as the shareholders, owners and partners of the corporation does, since they have a different kind of risk than the owners and shareholders, they come before the owners when it comes to payments even if the business goes bankrupt and cannot pay the bills.

Types of commercial loans

Ideally, there are different forms of commercial loans offered by a creditor depending on the type of lender as well as their business policies. These are:

  •          Bank financing for businesses for working and start-up capital
  •          Asset financing for machinery, equipment or business vehicles
  •          Mortgages
  •          Vendor financing through trade credits
  •          Credit card financing
  •          Personal or unsecured loans

The type of lender and loan you choose will however depend on several factors such as:

  •       The amount of loan required because for larger loan requirements you may need a combination of different types of commercial loans taken out from different lenders.
  •          The assets pledged as collateral for the loan if you are interested to take out a secured loan rather than an unsecured loan.
  •         The type of assets you want to pledge will determine whether you will get a mortgage that is typically offered against land or building or an equipment loan specially offered for financing such capital expenditure.
  •       The purpose of the loan as well as your financial condition will also determine the loan and mender type. If you want it for your business startup you may find it a bit difficult to get as compared to a loan for the expansion of your existing business. Startups usually have to look for more untraditional types of lenders.

Lastly, the term of the loan will also determine the type of lender to go to. Few lenders offer only short-term loans especially for a business startup while others offer only long-term secured loan with a building or land as collateral.

Different types of lenders

The most common types of lenders that may come to your mind are the traditional banks, different credit unions and several other non-bank financial institutions. However, apart from that you will also come across a few other less traditional lenders who are equally good sources to get the desired funds. Of course, each has their signature pros and cons that you should consider while selecting a specific lender. A few of these non-conventional funding sources are:

  •       Peer-to-peer lenders or P2P lenders as they are commonly known offering money to individuals through different online organizations
  •         Crowdfunding are others that work through different organizations with a god thing that they do not require any interest payments
  •          You can also borrow from your family and friends but make sure that you do not take such private party loans without any loan agreement.
  •    Lastly, borrowing from yourself is another way of investing especially if you want it for your business. In this case as well you must have a written contract that will specify your role as a lender, the payments as aspects as well as the consequences in case your business defaults.

However, before even looking for a lender, know your financial condition and have a proper plan to repay the loan.

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About Sandeep M. Advanced   Tour and travel

45 connections, 0 recommendations, 118 honor points.
Joined APSense since, May 18th, 2015, From gurgaon, India.

Created on Mar 18th 2019 06:47. Viewed 292 times.


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