In a country like Nigeria, the quest for knowledge on financial literacy is growing. It is the hold of this knowledge, from understanding basic financial concepts, that allows individuals to make informed and effective financial decisions. It’s quite agreeable that people with better financial literacy training make better financial decisions.
As the title of this post suggests, this article will help you understand financial lending that will allow you to know how to navigate in the financial system.
Let’s dive in.
To lend is to give (something) to (someone) to be used for a period and then returned or paid back in the future. In financial lending, there’s always an expectation that it will be repaid.
First, a definition of a lender will help understand financial lending better. Investopedia defines a lender as “an individual, a public or private group or a financial institution that makes funds available to another with the expectation that the funds will be repaid.” In a financial context, lending is a type of commercial loan. Financial lending is temporary, and repayment includes the payment of interest and is usually within an agreed time frame.
Financial institutions ranging in size from banks to credit unions and other lenders to angel investors and venture capitalists are the most common financial lenders. However, we’re experiencing a switch from traditional financial lenders to online finance platforms. Traditional lenders in Nigeria have recently embraced online lending with several leading banks having set up online entitles. The technology age has raised a rise amongst individuals in the interest of financial lending.
Most financial lenders provide funds for a variety of reasons. This includes providing loans to Micro, Small and Medium Enterprises (MSMEs) because as shown, these are crucial drivers of economic growth. Micro, Small and Medium Enterprises are pivotal to the development of a country’s economy, especially a country like Nigeria. Financial lenders look at the nature of the businesses, the character of the business owner (s) and projected annual sales and growth of the business.
In a financial lending process, terms such as time frame (period of return) and consequences of default are used to guide borrowers. The lender investigates the borrower’s credit history, examines the borrower’s credit report which carries detailed information on the names of other lenders extending credit, the types of credit given, etc. The report guides the lender in determining whether the borrower is comfortable managing payments based on current income to determine ability to pay. The borrower pledges collateral which its value is eventually evaluated. The financial lender also evaluates the borrower’s available capital which includes savings, investments and other assets which could be used to repay the loan.
The three common types of loan facility are: overdrafts (the most common form of bank lending and is used to help solve short-term, day-to-day cash flow issues), term loans (enables the borrower to borrow sums for a specified period of time, known as the ‘term) and revolving credit facilities (allows the borrower to draw down, repay and redraw loans up to the maximum aggregate amount during the term of the facility).
It’s a financial lender’s primary concern that money borrowed is repaid with interest, and they often take security to protect themselves against risk.
As technology advances our experiences with financial lending, the easier the innovation from online financial institutions to serve individuals better.