Lender

A lender is a person, a group (either public or private), or a financial organization that makes capital available to an individual or business, expecting that the capital will eventually be repaid. It is important to note that repayment usually includes the payment of interest and fees. In some cases, repayment can be incremental or a borrower can make a lump sum payment. Mortgages are one of the largest loans debtors take out from lenders.

Lenders explained

Lenders provide money for a wide range of reasons, for example, a small business loan, a car loan, or a home mortgage. Generally, the rules on how exactly the loan must be satisfied are stated in the terms of the loan. Funds that are past due, may be recovered by a lender. 

Loan approval process

Individual borrowers. One of the most important loan requirements is the debtor’s credit history. During the loan qualification, the lenders carefully assess the credit report of the prospective borrower. The credit report contains details on how a person manages credit, including items such as credit cards, car loans, and mortgages.

There are 5 factors that determine one’s score and all of them have varying levels of importance:

1. Payment history is the most important piece of one’s credit profile. Lenders pay a lot of attention to one’s credit profile as it helps them determine whether the borrower was responsible with his payments in the past and whether he/she can be trusted in the future. 
2. Amounts owed or credit utilisation is the second most important factor. If one wants to show that they can handle a reasonable amount of debt without going off the rails, they need to have a significant amount of money that they had owned in the past.
3. Length of credit history. The longer one has been borrowing, the better their credit score is.
4. Types of credit. Types of credit reviews how many sources of borrowings one uses.
5. New credit takes into account how often one takes on credit.

Sometimes, in order to confirm one’s creditworthiness, lenders use Fair Isaac Corporation (FICO) score in the debtor’s credit report. Debt-to-income (DTI) ratio is yet another factor that lenders can evaluate to determine whether the borrower will be able to pay or not.

In case if the debtor is applying for a secured loan, he/she has to pledge collateral. The lender will then evaluate the full value of the collateral and subtract the already existing debt secured by that collateral from its value. The remaining collateral value will be the equity that affects the lender’s decision. 

The available capital of the borrower can also be evaluated by the lender. Available capital consists of the borrower's investments, savings and any other assets that can be used to repay the loan in case one's income is cut because of financial distress.

Business borrowers. There are different procedures that lenders have for business owners.Small Business Administration (SBA) guidelines must be followed by banks and credit unions that offer SBA loans.

Venture capitalists, private institutions and angel investors lend money based on their own criteria. Such lenders will examine the business growth, character traits of the entrepreneur, the business operation location, and the sales forecast. 

In order to prove their ability to make loan repayments, small business owners have to provide lenders their personal and business balance sheets. 

Lenders for small business

There are three main types of lenders for a small business loan, they are:

• Small Business Administration (SBA). The SBA offers different types of loans for small businesses. The biggest benefit of an SBA loan is that the SBA partners with lenders to provide loans and guarantees 75% to 90% of the loan for the lender. 
• Conventional banks. Conventional bank loans generally have the best terms regarding interest rates and fees. However, it is rather difficult to actually qualify and get approved, especially for small businesses.
• Alternative lenders. These are online lenders of capital for businesses. Loan approvals typically take less than a few hours and funds are provided in less than a week. Also, alternative lenders have the easiest eligibility requirements and less rules for the use of the funds.