Types of lenders

Lenders enable businesses to accomplish things they wouldn’t be able to do without a loan. Whatever the specific need, a lender can grant the money to make it happen. However, lenders expect to get repaid and also make a return. In our latest insights article, Craig Darling, Partner and Head of business restructuring and recovery explores different kinds of lenders.

Overview of lending

When planning to borrow a loan, it is recommended to spend time researching different lenders in the market. Each lender offers different terms of loan and interest. The lender will also have its own set of criteria to evaluate in order to determine whether you qualify for a loan and what terms it will offer if you do. It will generally come down to factors such as your credit score, the amount of money you’re seeking, how much you are already borrowing, the length of the loan, and any assets you have to offer as security. Lenders have different attitudes to risk and it is only through research and identifying what lenders are out there and the differences between them that you can identify the lender and products that best suits you and your business.

Traditional lenders

High street banks

Traditional lenders such as high street banks are usually the first thought if you’re thinking of borrowing money.

Traditional bank financing includes lenders such as high street and other banks provide a range of services for businesses that follow a specific model. Funds are acquired from depositors and investors and then made available as interest-bearing loans for commercial use. Traditional bank lending is subject to underwriting requirements that remain much the same from transaction to transaction; larger loans typically require security, while smaller loans may be made on the basis of good credit histories and the ability of the borrower to repay. A traditional bank lender generally charges a lower rate of interest than other lenders.

Traditional bank lenders are great for commercial lending

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, businesses seeking to borrow need must meet robust borrowing requirements, with the lender requiring significant information and documentation in order for any loan to be credit approved. For that reason management input required and the time sink from the application being made to cash being received can be significant.

Bridging finance lenders

Many lenders – including banks – also offer short-term loans or bridging finance. These loans allow you to borrow over a much shorter period of time, maybe even just a few days. They can be used to cover short-term cash flow problems. But short-term business loans are usually offered at a much higher interest rate, so you will end up paying more.

Alternative lenders

Alternative lenders offer loans that are outside the normal banking system. They tend not to be subject to the same level of regulation as traditional lenders. Examples of alternative lenders include peer to peer and online lenders or lenders without a banking license. They mainly provide short-term credit and they may not require borrowers to provide security, although the amount of interest charged will vary depending on whether the loan is secured or unsecured.

Peer to peer lenders

Peer-to-peer lenders provide loans that involve you borrowing money from investors instead of from a bank. It’s typically conducted through a specialist online platform and allows a business to access a loan funded by individual investors. Investors bypass the banks and lend their money via a platform directly to a borrower.

Advantages of using peer to peer lending versus a traditional bank

An advantage to using this type of funding rather than a traditional bank loan is that they offer greater flexibility and are less strict in approving borrowing, often meaning you can access the cash more quickly. However, costs such as interest tend to be higher.
In its broadest sense, online lending is any kind of loan that’s not directly from a traditional bank. A number of online lenders are often referred to as online lenders because they are an alternative to a traditional bank.

What is an online loan?

An online loan is a loan where the entirety of the transaction will occur online. It is easier to be approved through online lenders than it is to be approved by those traditional banks. Most online loans tend to be more expensive than other loans as they will usually have higher interest rates as well, but this is to counter the risk involved with faster approvals, requiring less information or paperwork to approve and taking on loans for people that do not qualify for the traditional loan.

Commercial or specialist lenders

These lenders include invoice finance and asset finance lenders that can provide an alternative source of financing for your business. Because such lenders are willing to take on higher risk loans, they typically charge higher interest rates.

Invoice financiers

This is where a lender buys your outstanding invoices, thereby releasing the money you are owed by customers.

Two types of invoice financing

There are two main types of invoice financing: factoring and discounting. Factoring is where the lender manages the sales and collects money directly from your customers. Discounting is where lenders release funds and you pay back the outstanding balance as your invoices are paid by customers.
This type of lending can be quicker to obtain than traditional loans but can be more expensive, the cost of this type of borrowing typically being in the form of a service or discount charge.

Asset financiers

Asset finance provides lending to allow borrowers to purchase essential assets for their business. It lends against the assets, which differentiates it from a traditional bank loan and offers an alternative way to access vital assets for your business needs.

Different types of asset-based lending contracts mean that each one works slightly differently:

Asset finance and leasing agreements: The lender buys the assets you need and leases them back to your company for a set monthly amount.
Hire purchase asset finance: Your business pays a deposit plus monthly installments for an agreed period (usually 12 to 72 months). At the end of the term, the assets are yours.
Refinancing agreements: Releases capital tied up in assets by the lender buying the equipment from you and leasing it back.

Like invoice financing, asset financing can be easier to obtain than traditional bank loans but can be more expensive, particularly to buying certain assets outright (but must be balanced against the price payment being spread over time).

Contact us

We can help you identify the lender most suitable for you and assist in getting you access to them. To discuss further please contact Craig Darling at cdarling@gilsongray.co.uk