Lending vs Borrowing

Difference Between Lending and Borrowing

Lending refers to the process when an entity or individual person gives away its recourses to another entity or individual persons as per predefined mutual terms then whereas Borrowing refers to the process of receiving of resources by an entity or individual person from another entity or individual person with predefined mutually agreed upon terms.

Example of Lending and Borrowing

 A company, ABC Limited is involved in the development of infrastructure projects. They need funding to the extent of $100 million to complete their upcoming project for developing a road. They approached a Bank (XYZ Limited) to avail funding to the extent of $100 million for the said project and received funding from the Bank on mutually agreed commercial terms.

lender vs borrow1

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In the above example, XYZ Limited is lending money to ABC Limited. This process is known as lending and the XYZ Limited in this example is the lender. Similarly, ABC Limited in the example receives funds from XYZ Limited to complete the road project. This process is known as borrowing and ABC Limited is known as Borrower.

Lending vs Borrowing Infographics

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Key Differences

The key differences are as follows –

  • A process when an entity or individual person gives away its recourses to another entity or individual persons as per predefined mutual terms then it is known as Lending whereas the process of receiving of resources by an entity or individual person from another entity or individual person with predefined mutually agreed upon terms is known as borrowing.
  • Both are part of single transactions with different purpose of parties involved in the transaction
  • Lending is the process of giving money to an entity/person however Borrowing is a process of receiving money from an entity/person
  • In borrowing, resources are borrowed by a resource deficit entity from resource surplus entity. However, in lending resources are lent to a resource deficit entity by a resource surplus entity
  • The lending entity in the transaction receives interest against the moneylender to the borrower. However, borrowing entity pays interest to lend an entity against the money borrowed by the borrowing entity
  • Both are very critical to the economy of any country and operate with different purpose/business model. Lending the entity’s purpose is to earn interest on the money lend to borrowing entities. However, the borrowing entities borrow money for the purpose of their business expansion or individual borrow money to meet their goals such as house construction, children’s education, etc.
  • Both are executed on either commercial or non-commercial terms based on the nature of the transaction. However, most of the time the terms of transactions are dictated by lending entities and borrowers have a relatively lesser say in this.
  • Regulatory compliances for lending entities are much stricter than the borrowing entities.

Comparative Table

BasisLendingBorrowing
DefinitionLending is the process of giving money by a resource surplus entity/person to resource deficit person/entity on commercial terms or non-commercial terms based on mutual understanding.Borrowing is a process of taking/receiving money by a resource deficit entity/person from resource surplus person/entity on commercial terms or non-commercial terms based on mutual understanding.
PurposeGenerally, the purpose of lending is to earn interest on the money lent to borrowing entity. The business model of most of the lending entities such as Banks and Financial Institutions is to earn interest by lending money to entities in need.The purpose of the borrowing entities to deploy the borrowed money or resources in the day to day operation of the Company or to set up a new project or to expand the business etc.
Money/Resource  Flow in TransactionFrom a resource surplus entity to resource deficit entity.From a resource surplus entity to a resource deficit entity.
Parties InvolvedBoth are part of the transaction.Both are part of the transaction.
Nature of BusinessA Lending entity’s primary nature of the business is generally lending money to entities looking to expand or set up businesses. A major example of lending entities in the real world are Banks and Financial InstitutionsA Borrowing entity may be involved in various businesses wherein they need resources/money to operate or to set up new businesses. 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 TransactionTerms 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. In the case of a borrower with string financials, terms of borrowing are dictated by borrowing entities.
Interest PaymentLending entities receive interest payments against the money lent to borrowing entity based on mutually agreed terms.Borrowing entities pay interest against the money borrowed based on mutually agreed terms.
ExampleA Bank named ABC Limited, lending $100 million to an entity XYZ Limited to set up a road project on commercial terms is an example of the lending process. ABC Limited in this process is the lender.In the same example, the entity XYZ Limited is borrowing $100 million to use that money for setting up the road project. This process is known as borrowing and the entity XYZ Limited is known as a borrower.

Conclusion

Lending and borrowing are both parts of a single transaction wherein one party is a lender and the other is the borrower. Both are required for a lending or borrowing transaction to be completed. They basically involve resource transfer from resource surplus entity to resource deficit entity on mutually agreed terms. A lending entity generally gets paid interest on the money lent to borrowing entity.

Both are very critical for any economy to grow as these help in the effective utilization and transfer of resources in a systematic manner within the economy.

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