The growth of big business would be severely stunted without the money lending business. Banks and finance houses exist primarily because they are in business to offer the vital service of project finance. The beauty of this business is that it is a sort of win-win situation for all the parties involved in the deal.
When banks lend money to individuals and corporate bodies, the idea is to kill two birds with one stone. The capital can help the business expand its operations. The bank can also charge interest and transaction fees on the loan. In this symbiotic relationship, the money lender makes profit and so does the borrower.
Naturally, organizations in the money lending business are not out to lose money. Arrangements have to be made to ensure that people who borrow money do not default. This is where collateral and security come into the picture. If a business entity wants to borrow money, the money lender will have to ensure that the borrower provides some sort of collateral. This is meant to cover the money lender in case the borrower is unable to repay the loan.
In most cases, collateral may be in the form of landed property. Other acceptable forms of collateral are shares certificates. In some cases, cash deposits can be pledged by a third party. Actually, insisting on security does not imply lack of trust on the part of the party making the loan available. The purpose of security is to guard against the unexpected. It is also necessary to have security so that the officer who authorizes the loan will be covered in case of default or delay in repaying the loan.
It has to be added that the money lending business is usually based on trust. People who lend money to others have to trust the borrower to a certain extent before making the cash available. The lender would also have to exercise utmost good faith and repay the loan in accordance with the terms of the loan. This is how the borrower can earn the trust of the money lender.