In banking industry, Lending and finance, both of the terms are used for loans in general but different from each other.
Let us talk about Lending first. What do you understand from the term lending? Lending means to borrow something from someone. The lender may be any person, any financial institution or any bank. Suppose you borrow a fixed amount of money from a bank for a fixed period of time. You will have to keep something with the bank which will be of similar value. The bank will hold till your asset till the time you don’t repay the loan and that is called collateral. In case of default, the bank can sell the collateral and recover its money.
Now comes the financing, in this you buy any product with a particular interest rate for a particular period of time for example any vehicle or a house. You have to pay the timely installments of this loan and if you default then your asset can be acquired by your lender and further sold for the recovery of the money. This kind of financing is often known as the asset based financing.
This process of asset based lending is also known as the commercial finance. Accounts receivables are the ones that secure the asset-based lending. It is natural that lenders mostly are in favor of receivables as they fall in the category of most liquid assets, and also less prone to physical damage, shrinkage and other hardships experienced by tangible assets.
There are certain set of assets which can be used as the collaterals. Machinery, real estate, equipment are some of the assets which are best used as the collaterals against the asset building liabilities. Eligibility as the collaterals extends to the non-traditional assets as in the intellectual property or the trade names. Fixed assets are most frequently used by the Companies as the borrowing base because schedules, payments and term are already set for a loan.
As the tradition goes on and the generations pass by, there is one norm which is fixed in everyone’s mind and i.e. the banks or the credit unions are only the places from where we can take the loans. Nothing more or nothing less than that is known or accepted. But this is not all. Now-a-days there are an ample of residential property owners who are willing to provide the loans against the traditional mortgage. These people are smart investors who hold property and make use of it as an investment or the timely income stream.
Lending and financing are two major functions of any financial institution or the bank or the real estate agents. These people hold some assets as collateral’s against the loans paid to you. You are required to repay the loan in time. In lending you have to repay the whole amount with or without interest and in Financing, the installments should be paid in time.
In case you are unable to repay the loans they can sell the collateral to recover their money. Asset based lending and the commercial finance is one of the types of the loans which work on the similar process.