Lending Options: Exploring Alternatives to Banks for Loans

The economic situation is currently tense: many companies and private individuals are desperately looking for loan financing.

Are only banks possible contacts for this? Are there alternatives? How does the German legislature regulate lending? We will address these complex questions in the following article.

Most people are familiar with the term banking license: credit institutions need permission from the supervisory authority to offer their services in Germany.
A Market entry requires a successful permit application. However, this fact should not lead to the false conclusion that only licensed banks are allowed to grant loans. In principle, any legal or natural person can act as a lender. It depends on the type and scope of the loan agreements.

With credit brokers, there are additional players to whom separate rules apply. Their business model is: bringing lenders and borrowers together and the commission for loan brokerage rake in. In this intermediary activity, the service providers are not directly involved in the credit business, which is why other laws apply.

Possible lenders at a glance

There are numerous types of lenders and various types of loans. This creates a complex picture when granting loans. An example should make this clear: Dealers offer their customers an installment purchase.
In this case it is dealer financing as a special form of loan. If the dealer organizes this installment financing independently, no traditional bank is involved. The dealer acts as a lender himself. However, many companies work with banks, which handle the financing on behalf of the seller.
Then it is again an installment loan from a bank.

A look at the numerous variants of loan agreements shows that the situation is confusing. It is therefore worthwhile to approach this topic systematically. One approach is to classify lenders into different categories:

• Banks/credit institutions: These service providers conduct the lending business professionally. It is an integral part of their business model.
• Other companies: These companies also grant loans, for example to customers and business partners. However, lending is not part of their core business; it serves other purposes such as sales promotion.
• Private individuals: They are also allowed to grant loans. This often takes place among relatives or friends. Platforms for arranging private loans have also been established.
• Credit broker: They arrange all kinds of loans. These can include bank loans or personal loans.

The distinction between lenders is legally relevant. There are sometimes different rules for the individual actors, this applies in particular to the areas of authorization requirements and transparency.
At the same time, there are common legal frameworks for loan agreements. This concerns the formalities and the content. Section 138 of the Civil Code (BGB) prohibits all lenders from conducting immoral transactions, which in this context means the ban on usurious interest rates.

Classic lenders: banks

Most people associate loans with lending by banks. Whether it’s a branch bank or an online bank: banks are the first point of contact for consumers, self-employed people and companies. This is because credit institutions issue loans on a large scale and offer a variety of types of loans.

The spectrum ranges from overdrafts and installment loans to construction loans and investment loans. Banks offer tailor-made financing for every purpose. This also includes various special loans – examples are:

• Startup loan
• Student loan
• Car loan
• Renovation loan

Compared to other lenders, banks have strict requirements. You need explicit permission from the BaFin as the responsible supervisory authority and must submit to strict regulation. For example, you are obliged to regularly inform BaFin about your credit transactions.

This can be easily explained: banks are the dominant players in the credit sector, and at the same time credit transactions have a significant impact on the entire national economy and even the global economy. The banking and global economic crisis at the end of the 2000s impressively confirmed this.
If, among other things, banks grant real estate loans too generously, there is a risk of a real estate bubble. If this bubble bursts, the real estate and credit markets collapse. This has fatal consequences and can lead to bank insolvencies and economic collapse.
The state therefore has a great interest in strictly controlling banks.

Special case of promotional loans

State or public banks also deserve mention. In contrast to private credit institutions, these serve certain public welfare purposes. With cheap loans, they promote, for example, economic development, the ecological restructuring of society or studies for people with little financial strength.
In practice there are two variants:

• Development banks grant loans directly to those entitled.
• The public institutions work with private banks. The partner banks are responsible for granting loans and processing them.

Companies as lenders

Loans from companies play a relevant role in different variants. Several categories can be named:

• Supplier credits: Suppliers give their commercial customers flexibility in payment. These are short-term, usually interest-free loans.
• Dealer financing: Customers can pay for their goods later or in installments.
• Loans to business partners: Companies help partners with acute financial needs because they have a great interest in economic survival.

Companies are largely free to decide how they structure the relevant loan agreements. It is important that you record the loans correctly on your balance sheet.

Personal loans: Loans from private for private

Personal loans are particularly popular in personal environments. For example, grandparents can help build a house with an interest-free loan. A friend borrows money to meet an urgent financial need. In these and other cases, it is advisable to heed a well-known saying: friendship ends with money.

This doesn’t mean that all personal loans will have problems. But there is a danger and everyone should be aware of that. Experts recommend putting such loans in writing.
It doesn’t matter whether it is a free loan or a loan with interest. A loan agreement contains all the important key data on the possible interest rate and the repayment modalities. In the event of a dispute, such a contract proves to be important!

The role of credit intermediaries

Credit brokers are financial service providers who do not issue loans themselves. Instead, they limit themselves to brokerage and advertise themselves as finding the best conditions for clients.

With this approach, intermediaries act as a special case: they deal with the lending business on a commercial basis, and stricter regulations apply accordingly. They must prove their reliability and orderly financial situation to the trade office. At the same time, they are not directly involved in the lending business, which is why they do not come under the strict supervision of BaFin.

Lending – a broad field

What does each lender’s breakdown mean for potential customers?
In the first step, you should check which contact persons are possible. At best, it is a state development bank or a credit broker that guarantees favorable conditions.