All lending and borrowing situations virtually have mixed motives of the parties involved in such cash transaction. The parties, the borrower as well as the lender want to benefit the most from such transaction, albeit to varying degree. These mixed motives may give rise to conflicts of interests, at least to some margins. Therefore, there is an immediate need for usury and lending laws that will put such conflicts within the limits and to the minimum.
As for the borrowers of business loans, their primary motive is to get the required funds to run their business at the least possible cost.
These borrowers most rely on paid-in capital to fund their business ideally but in such cases they put their equity at risk. This risk is even more felt when the money put in belongs to the owner of the business.
On the other hand, if such funding comes from the investors they will like to own shares of the business. This means the owner loses a significant part of control over the business. More the investors’ fund less will be the business ownership.
However, at a point of time even the most persuasive owner who is able to get such equity funding from the investors much easily will feel the constraints of money especially when he or she loses control on the business.
Performing a balancing act
In such situations, it needs to make a balancing act which is when debt or borrowing money from other sources at interest seem to be the most feasible and an attractive alternative source of money.These sources could be a traditional bank, any financial institution that deals with lending money, the lines of credit or even private and online sources such as Liberty Lending.
However, this is also the time when the owner's motive will come into play in different ways:
They will try to get as much unsecured funds as possible to meet the deficit at the lowest possible rate of interest.
If that is not possible they will want to get the funds by obtaining secured loans wherein they will even be willing to put a part of their assets at risk offering it as collateral for the loan.
In most of the cases it is found that the owners usually try to avoid such debts because servicing these often costs money. This money will happen from the cash flow, thereby reducing it. It is for this reason all business owners want to carry as little debt as possible. This helps the equity of the business to grow more rapidly.
The scene of independent investors
When you consider the independent investors of the business they will have an entirely different set of motive. Typically they will:
Want to pay as little for each share as possible
See the value of that specific share grow
Leverage their investment by matching it with borrowing, the more the better.
Once again, the constraints set in here as well. As per the current law, in case a business fails and has to close down, it is the creditors of that business who will get the first preference to be paid from the proceeds of the business after sale, merger or acquisition. The next on the line will be the shareholders or the investors. If the business is highly leveraged then these investors are even more likely to lose their total investment.
That means, leveraging a business may be good but only to that extent to which it is in line and sync with the business requirements, availability of funds and its return.
Lastly, looking at the matter from the perspective of the lenders, the law also has something for them that will provide them with proper cushioning to save their investments from going bad.
Typically, the source of sustenance of the lenders that keeps them moving is their desire to earn more profit by lending their hard earned money safely foregoing their opportunity to put it on other alternative earning modes.
There are different sources of cash that borrowers can avail according to the amount of loan they require. These sources are:
Credit unions and
Insurance companies for large amount of money.
As for the smaller amounts, they can consider Peer to Peer lending and other alternatives.
However, all these sources of cash are typically restrained and regulated by the money lending law. They make the best from the money lending market using their prudence about lending money taking cue from their pervious speculative investments made.
This actually helps them to learn from the previous outcomes and mistakes and make necessary alterations in their business policy so that they do not lose on the money that they hold for others in trust.
Summing it up
The law therefore controls the speculative investments of the money lenders as well as the investors in a business as well as the interests of the borrowers.
As for the money lenders, they are more conservative than the others due to their very structure of business and their policy. Their primary aim of the money lenders is to earn more profit and predictable earnings by implementing all possible safest means.
The money lenders therefore want to lend money in the form of secured loans more and at a higher rate of interest. This ensures them safety of their money as well as high revenue generation both.
However, this motive of the money lenders is kept within the limits, if not low by the competitive forces and the federal laws of money lending. This leads to specific situations in lending money to the borrowers.
The money lenders are now more inclined to lend money to those specific borrowers who are comparatively at low risk and are ‘safe’ bets to lend. They look for the financially strongest borrowers as much as possible.
If, in case the regulatory laws of money lending by the government compels them to lend money to the weaker customers, they typically hedge their risks of lending to them by charging more.Updated Date: 30 July 2019, 03:00