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B U S I N E S S L A W & TA X E S FINANCING

What Is Lending and Types of Lenders?

•••

B Y J E A N M U R R AY | Updated December 03, 2019

Lending (also known as "financing") in its most general sense is the temporary giving of
money or property to another person with the expectation that it will be repaid. In a
business and financial context, lending includes many different types of commercial
loans.

Lending and borrowing are the same transactions from the two viewpoints.

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What Is a Lender?

Lenders are businesses or financial

institutions that lend money, with the
expectation that it will be paid back. The
lender is paid interest on the loan as a cost of
the loan. The higher the risk of not being paid
back, the higher the interest rate.

Lending to a business (particularly to a new

startup business) is risky, which is why
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lenders charge higher interest rates and
often they don't give small business loans.

Lenders do not participate in your business in the same way as shareholders in a

corporation or owners/partners in other business forms. In other words, a lender has no
ownership in your business.

Lenders have a different kind of risk from business owners/shareholders. Lenders come
before owners in terms of payments if the business can't pay its bills or goes bankrupt.
That means that you must pay lenders back before you and other owners receive any
money in a bankruptcy.

What Are the Types of Commercial Loans?

• Bank financing for small business start-up and working capital

• Asset financing for equipment and machinery or business vehicles.
• Mortgages
• Credit card financing
• Vendor financing (through trade credit)
• Personal (unsecured) loans

The type of lender you will need for a Advertisement

business loan depends on several factors:

• Amount of loan: The amount of money

you want to borrow influences the type of
lender. For larger loans, you may need a
combination of types of commercial
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• Assets pledged: If you have business Enjoy low monthly amortization
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loan, you can get better terms than if your Advertisement

loan is unsecured.

• Type of assets: A mortgage is typically for land and building, while an equipment
loan is for financing capital expenditures like equipment.

• Startup or expansion: A startup loan is typically much more difficult to get than
a loan for expansion of an existing business. For a startup, you may have to look at
some of the more untraditional types of lenders described below.

• Term of the loan: How long do you need the money? If you need a short-term
loan for a business startup, you will be looking for a different lender than for a
long-term loan for land and building.

What are Different Types of Lenders?

The most common lenders are banks,​ credit unions, and other financial institutions.

More recently, the term "lender" has been expended to refer to less traditional sources of
funds for small business loans, including:

• Peer-to-peer lenders: Borrowing from individuals, through online organizations

like Lenders Club.

• Crowdfunding: Through organizations like Kickstarter, and others. The good thing
about these lenders is that they don't require interest payments!

• Borrowing from family and friends: ​There are organizations that help sort out
the tricky financial and personal issues involved with these transactions. If you are
considering a loan from someone you know, be sure to create a loan agreement.
These agreements are sometimes called private party loans.

• Borrowing from yourself

yourself:: You can Advertisement

also loan money to your business as an

alternative to investing in it, but make
sure you have a written contract that
specifically spells out your role as a
lender, with regular payments and
consequences if the business
defaults.
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As you look for a lender, consider the type
of loan you need, whether you have any
assets to pledge against the loan, and the other factors that will determine your ability to
get a business loan and the terms of that loan. Be prepared by creating a personal
financial statement, a business plan and financial statements for your business.

SBA Loans and Lenders

You might also consider the Small Business Administration, which works with lenders to
provide guarantees for loans to small businesses. Their 7(a) loan program helps small
businesses get loans who might not otherwise qualify because of "weaknesses" in their
applications. The SBA also has other special loan programs that your business might
qualify for.

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