Before moving forward to lending, First of all we will discuss two terms related to today’s topic.
- Lender: A lender is one who helps people financially.
- Borrower: A borrower who borrows money from a lender.
Meaning
Lending is called when the lender helps the borrower financially whether by offering money, property, and any asset so that he can get help. Lenders do not give anything for free but take their full interest and the borrower also has to give that interest. It is also true that lending happens only so that the lender takes interest by paying, their expectation is that the borrower will give them returns. Lending has become like a business, earning money by climbing interest. If we designate it in a simple term, lending is like a loan that takes interest from the lenders for some time and instead gives interest to them every month or annually.
We clear this term by giving an example: Suppose you have a business in a big city and you need a large amount of money to purchase a land, so you can contact a lender who provides land, money, and other property, assets at interest and all the lenders have different interest charges. Lenders provide many types of loan such as
- Business loan,
- Property loan,
- Assets loan,
- Working capital loans,
- Mortgages loan or home loan,
- Credit card loan,etc.
Who can be a lender?
Lenders can also be an individual, businessman, entrepreneur, friends, bank or other financial institutions and these lenders have different rates of interest according to business risk. If someone has a new startup business and the lender feels that there is a higher risk in his business so they charge a higher rate of interest and if there is low risk in his business, so they charge a lower rate of interest. The lender is not a partner of any kind in your business because neither it is an owner, it is a shareholder, it is in a partnership, or it is an employee. He/she is just a person who only does financial help in many ways for business purposes. The lender does not do this financial help to anyone, instead he checks the background of the borrower, what kind of business is that, how much risk in that, how much income in that, how long they need money, and other financial information, if they find everything right, then they further increase the procedure and provide loans to them. They all do this because there are many types of risk in business so it is important to survey them because in future they have the official right to take all out of their money with full interest if the company goes bankrupt and suffers from any worst financial situation.
Some kinds of lender:
- Peer to Peer lenders: It is also known as P2P lending, provides online web services to all individuals and business whose interest rate is always lower than financial institutions. With lower interest rate, their services also cheap because it is unsecured for both individuals and business with higher risk of take out money from P2P lending company. It includes a variety of loans such as student loans, business loans, payday loans, real estate loans.
- Crowdfunding: It is like a P2P loans who connect with the people digitally through sites and help them with money and some other exchange form. But there is a little difference between them, it receives project being fund from the borrowers. It is like crowdsourcing marketing who work worldwide, in which a large group of people suggest some ideas, show their creativity, financial advising, art creativity, designing and a lot of things.
- Family and friends: They can also become a lender because in the worst situation, family or friends always stand for helping and in case of financial help, so borrowers can also take out money from them on interest for a fixed period of time.
- Banks or other financial institutions: They are the actual loan providers, who offer many kinds of schemes of loans where borrowers can take easy loans such as home loan, personal loans, property loan, education loan by just filling some formalities and follow some legal procedure and take money on valid interest.
Variety of lending
There are two variety of lending such as:
- Personal or individual: This kind of lending, in which borrowers take for their own purpose such as get a credit card for shopping.
- Business or commercial: This kind of lending, in which borrowers can take for their commercial purpose such as get a credit card for purchase of stock, equipment for business. Thi loan requires collateral as a security
Because both are different situations, different risks, different priorities, different motives, different goals.Everyone has to fulfill legal formalities whether it is for personal loan or for commercial loan.
In small business, most of the owners want to take a loan from SBA because they don’t act as a lender, they provide loan as a guarantee of repayment by borrowers and also provide guarantee of loan and give a small amount of money for microbusiness.