What is the difference between lenders and borrowers

Login details for this Free course will be emailed to you. Email ID. Contact No. Funds provided by the financial institution or the bank or NBFC to an organization for a specific objective or purpose, which is to be repayable after a short period of time is known as the lending of the funds.

Funds will be called as borrowed when an organization or an entity gets funds from another entity which will be repayable after a certain period and will be carrying an interest rate. The purpose and the key objective of lending money are to gather interest income on the amount of money or say the principle lent to some person for a certain time.

The purpose or the objective of borrowing would be to use the money for specific purposes such as medical expenditure, home construction, hospital expenses, private functions, school education, higher education, and the like. Borrowing means one would be taking up and exchanging something else and thus paying something premium. In lending, the intention is to earn something, and that one has access with himself. Other factors may also be considered, such as environmental or economic conditions.

Private institutions, angel investors, and venture capitalists lend money based on their own criteria. These lenders will also look at the purpose of the business, the character of the business owner, where the business operates, and the projected annual sales and growth for the business.

Small-business owners prove their ability for loan repayment by providing lenders both personal and business balance sheets. The balance sheets detail assets, liabilities, and the net worth of the business and the individual. Although business owners may propose a repayment plan, the lender has the final say on the terms.

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A major example of lending entities in the real world are Banks and Financial Institutions. A major example of borrowing entities is large business houses operating in sectors such as real estate, steel, power, energy, roads, etc.

Risk Exposure. Lending entities in these transactions are generally at higher risk because of risk associated with borrowing entities defaulting on returning the money to the lending entity. Borrowing entities are relatively at lower risk in comparison to lending entities as they are receiving money from the lending entity for their businesses.

Terms of the transaction are decided based on a mutually agreed basis but mostly dictated by the lending entities. The terms of the transaction are decided based on a mutually agreed basis. United Bank Corp. Financing agreements typically also have requirements that ensure that the borrowing entity is solvent. The timing of the solvency test designated in a given agreement may be critical and potentially outcome-determinative in assessing the availability of credit.

Some funding agreements may only require a solvency check at signing, while others assess solvency at closing or upon each draw of funds. A rapid drop of asset values due to COVID may have caused insolvency in a company that was solvent several weeks ago. Therefore, companies seeking to draw additional funds on existing credit should be mindful of the point at which their credit arrangements assess solvency.

Loan agreements often contain material adverse change or material adverse effect clauses that provide that, as a condition to drawing on a loan, the borrower must represent that there has been no material adverse event or circumstance.

Whether or not a MAC has occurred may also trigger acceleration of debt or an event of default under a lending agreement, depending on its terms. MAC clauses are typical in standard credit agreements. In the absence of ambiguity, courts enforce these clauses as written, without resorting to extrinsic evidence. However, courts have at times found ambiguity in determining what constitutes a material adverse change, and in such cases, have considered extrinsic evidence.

There have been several recent cases where MAC clauses have been litigated in the context of a loan agreement. For example, in In re Lyondell Chem. Wachovia Bank, N. The Court concluded that the MAC clause was ambiguous as to whether it included any meaningful or significant change in market conditions regardless of foreseeability. Instead, the determination of whether or not coronavirus-related events give rise to a MAC is a highly context-specific inquiry.

Margin calls require a borrower to either repay some portion of the loaned amounts i. These type of lending arrangements may raise a whole host of additional legal issues, including, but not limited to, a requirement that the lender value the assets in good faith. The current economic climate may also present situations where a party may prefer breaching an obligation to lend to proceeding with a transaction that it can no longer afford.

Unless a contract provides otherwise, it is well established under the doctrine of efficient breach that a party to a contract can chose to breach and pay damages due as a result of that breach in lieu of performance, if such a decision promotes its legitimate economic interests.

Such claims may entitle a borrower to consequential damages, including the profits the company would have achieved but-for the breach of contract that caused its bankruptcy.

If a lending agreement contains this type of waiver provision, then upon breach for failure to lend, borrowers are generally limited to two types of remedies: 1 direct or actual damages and 2 restitution. Often, direct damages will equal the difference between the interest rate contained in the loan document and the prevailing market interest rates for the duration of the loan.

Restitution—the form of damages awarded in Lyondell —restores the borrower to the position it occupied prior to entering into the loan agreement for example, by returning commitment fees and other amounts already paid.

For more on specific performance, see pages below. Resort Communities, LLC v. The contract contained a limitation of liability provision barring special, consequential, indirect or punitive damages. For example, a loan agreement may state that liquidated damages can be available to the non-breaching party in the event of a knowing or intentional breach.