Lending is a common term in finance. It is the process of giving something to someone on credit in exchange for repayment. Common lending entities include banks, insurance companies, and financial institutions. The money that is lent is usually secured by some form of property or asset. Lending dates back to ancient Mesopotamia, when agricultural communities borrowed animals and seeds, promising to return them once the crops were harvested or the animals gave birth. Unlike other stakeholders, lenders do not own the business they lend to.
A frictionless capital market would always allow firms to access capital for investment opportunities with positive net present value. However, small firm managers frequently complain that they cannot borrow enough capital at reasonable rates. Some economists suggest that market frictions are the cause of this lack of capital flow to firms with lucrative investment opportunities. Other economists have explored the role of information asymmetries and agency costs in this process. In any case, the goal is to ensure that lending opportunities are profitable for both parties.
People who use credit cards and pay on installments are both borrowers and lenders. While the lender gives the buyer a loan for the goods they buy, the borrower must pay the bank the money they borrowed plus interest. As the lender, the bank earns interest on the principal, and the borrower receives repayment in the form of goods, increased courtesy, or implicit commitment to help in the future. When money is loaned by family and friends, it is often referred to as lending.