Lending which is also known as “financing” has seen a lot of evolution since its early stages. If you consider the most general sense of it, it is the practice of giving money to a person temporarily to use for any purpose with an expectation that the full amount along with a fixed interest will be repaid. However, in the business and financial setting, money lending includes a whole lot of different types of commercial loans.
Ideally, money lending and borrowing are two same transactions but are viewed from two different viewpoints.
A lender is a person or business or a financial institution that offers loans. In return, the lenders charges interest on the loan amount as the cost of it. The higher the risk of not getting the money back, the higher is the rate of interest.
If you take out a business loan then the lender will not participate in your business in the same way as your shareholders or partners. In fact, a lender has no ownership in your business though they have a different kind of risk as compared to the business owners or shareholders.
However, when it comes to payment, lenders must be paid back even before you or your shareholders receive any money from the business. This rule remains the same even if you file for bankruptcy.
Types of commercial loans
There are different types of commercial loans such as:
- Small business start-up loan
- Loan for working capital
- Asset financing such as equipment, machinery, and business vehicles
- Mortgages
- Personal unsecured loans
- Credit card financing and
- Vendor financing through trade credit.
There are different factors that will determine the type of loan you will need for your purpose such as:
- The amount of money you want to borrow because for larger loans you may need to combine different types of commercial loans and also take it from different sources. You may approach a bank and also apply online through sites like https://www.libertylending.com/ or any other.
- The type of assets pledged will also influence the type of lender you need. If you pledge business assets as collateral for your loan, you can get better loan terms as compared to an unsecured loan.
- Type of assets needed to mortgage such as land or building or equipment will determine the type of loan and lender you want.
- Startup loans are much more difficult to obtain get than a loan for expansion of your existing business. This is because startups are considered to be high risk customers. It is for this reason a startup usually look at some other untraditional types of money lenders.
- Term of the loan or for how long do you need the money is another factor that will determine the type of person you much approach to borrow money. You must look for a different lender for a short term loan and for a long term loan for land and building, if the entity does not do business in both the areas.
There are different categories of money lenders that you may choose from. Typically, it is thought that the most common lenders are banks or credit unions, and all other financial institutions. However, in this new age of money lending business and credit, the term ” money lender” has been expended to refer to the less traditional sources of funds to finance small business loans. This category includes:
- Peer-to-peer lenders: Also known as P2P lenders they are individuals to borrow from or different online organizations.
- Crowd funding: This is also provided by different organizations and the good and surprising thing about these lenders is that they do not need interest payments.
- Family and friends: You can also borrow money from someone you know but you must make sure that you make an agreement with them. Such loans are sometimes called private party loans.
- Self-borrowing: You can even borrow money from yourself. No matter how surprising it may sound to you, this is an alternative to investing money in your business. You must however make sure that you specify your role as a lender in a written contract along with the regular payments you expect as well as the consequences if your business defaults.
The way money moves now is way different it did in the past. This shift has made money lending much similar in importance to the very effectual corporate markets such as bond trading and commercial paper. In this modern time, money is moving to the consumers.
About the process
The process of money lending was cumbersome and time consuming and much of it did not make any sense. It lacked a transparent marketplace as it was in the marketplaces for the cost of other goods and services. While getting a loan for example in the energy sector, the trade commodities contracts were treated just like that: commodities.
Money now is considered to be the most fungible and basic commodity of the economy. Therefore, now you do not have to extract money from a lender but it is now lent to you. This is because the banks and other financial organizations actually do not give anything that belongs to them. On the contrary, the money they lent out belongs to someone else such as:
- The Federal Reserve
- A bond holder or
- A regular customer of the bank who deposits their money.
Now, money moves freely across states, nations, and certainly to the consumers who will pay the most for it on a risk-adjusted basis.
When you apply for a loan now, you do not have to go through all kinds of hoops no matter whatever type of loan you have applied for as it was in the past. The process remains the same for all whether you are:
- A small business
- A consumer
- Looking for a credit card
- Wanting a mortgage
- Looking for a personal loan or an auto loan.
On the contrary, in the past there were a lot of intermediaries and a lot of tiresome paperwork that confused the consumers and naturally prevented the money from “flowing to the consumers” just like it should have. Everything now has changed.
