A business or financial institution that extends credit to companies and individuals
Written byCFI Team
What is a Lender?
A lender is defined as a business or financial institution that extends credit to companies and individuals, with the expectation that the full amount of the loan will be repaid. The lender earns interest on the credit, which is charged at a specific percentage of the total amount of loan extended to the borrower. The loan repayment may occur in installments, such as monthly repayments or a lump sum payment at a later date.
The lender provides credit that can be used for various purposes, such as financing working capital, student loan, or business capital. Businesses can also borrow credit to provide a backup line of credit to the business, where the cash flows generated are irregular.
Summary
- A lender is a financial institution that lends money to a corporate or an individual borrower with the expectation that the money will be repaid at a later date.
- Lenders require borrowers to pay interest on the amount borrowed, usually charged at a specific percentage of the total amount of loan.
- A lender can be a person, group, or business that specializes in providing loans to individuals and corporations.
The Lending Process
The process of lending may be initiated by either the lender or the borrower. Most commonly, the borrower approaches the bank for a loan and is required to fill a loan application form. The information needed in the application includes the amount of loan requested, the intended use, current cash flows or income, the physical address of the borrower, names and addresses of guarantors, etc.
The bank may also approach an individual or corporation with a proposal to lend them credit at certain terms. The potential borrowers, in such a case, are often high net worth individuals and high-growth businesses that may be in regular need of credit for investment or funding working capital.
Types of Lenders
1. Traditional lenders
Traditional lenders mainly include banks, credit unions, and other financial institutions that provide loans to small and medium-sized businesses. Generally, such lenders offer the best terms of all the available commercial lending options, and they are used as a benchmark to compare other alternative lending platforms. However, individuals and businesses seeking credit from traditional lending institutions must meet the stringent borrowing requirements that are provided by financial institutions.
2. Alternative lenders
Alternative lenders enjoy the benefit of relaxed regulations by federal agencies, and they are not subjected to the same level of regulation as traditional lenders. Examples of alternative lenders include online lenders, peer to peer lenders, and crowdfunding. They mainly provide short-term credit, and they may not require borrowers to provide collateral.
For large amounts of loans, alternative lenders may require borrowers to provide more documentation than traditional lenders require. Some of the documentation required includes business and personal financial statements, credit reports, business plans, proof of employment, etc.
The amount of interest charged on the loan depends on whether the loan is secured or unsecured. Unsecured loans often attract a higher interest rate than the rate charged by traditional lenders due to the high risk of loss.
How to Find a Lender?
When planning to borrow a loan, it is recommended to spend time researching different lenders on the market. Each lender offers different terms of loan and interest, and it is only through research that one can determine the best ones to approach.
Start the research based on the type of loan needed since most lenders focus on lending specific types of loans. Ask for recommendations from family, friends, advisors, mentors, and colleagues who borrowed money in the past. At the very least, pick two different lenders and compare them to determine the most favorable option.
The best place to start with when borrowing a loan is banks and credit unions. Such financial institutions are a good choice if taking out a business loan, home equity loan, personal loan, or auto loan. For bank clients or credit union members, approach the credit department to discuss the loan request.
Factors to Consider when Finding a Lender
1. Amount of loan
The amount of credit needed will determine the type of lender that should be approached. For small loans, family, friends, and peer-to-peer lenders can be viable options, since there are little to no borrowing requirements. For large business loans, approach a bank to see the terms and interest that they offer.
2. Startup business
Most commercial banks shy away from lending to startup companies due to the absence of stable cash flows and transaction history with the bank. The best places to get a startup business loan are the less traditional types of lenders, such as family and friends, crowdfunding, and online lenders.
3. Pledged assets
Most lenders require borrowers to provide collateral against the loan provided. If there are business assets with verifiable proofs of ownership, loans can be obtained from financial institutions with ease and at better terms. Offering assets as collateral provides a level of assurance to the lender that, in case of default, the bank can sell or auction the asset to recover the total amount extended as loan.
Related Readings
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:
