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Balance Sheet Lending – Everything you need to know

Balance Sheet Lending: How Do These Loans Work?

Understanding what balance sheet lending is and the benefits it offers small business owners and entrepreneurs will help determine if a balance sheet loan is right for you. Here’s an in-depth look at how it works and how it compares to other funding solutions.

Are you considering a balance sheet loan? For many business owners and entrepreneurs, balance sheet lending has become the funding solution of choice.

This kind of loan is typically offered by smaller financial institutions and the debt is kept on the original lenders’ books.

Before you decide if this is the best solution for you, the team at Commercial Finance Network encourages you to learn how it works as well as the advantages and disadvantages that come along with this type of funding.

What Is Balance Sheet Lending?

Also referred to as portfolio lending, balance sheet lending is when the original lender of a loan keeps the debt on their financial statements throughout the loan’s life cycle.

In short, when you get a balance sheet loan, the lender takes on all the risk, holding all the money they’ve loaned on their balance sheet.

More often than not, balance sheet lenders are small financial institutions, like local savings and loan banks and life insurance companies, mainly financing small and medium properties.

Due to their small size, these lenders will give you around 65% of the funds needed for a purchase, which is lower than what larger financial lenders would provide. This is in part because balance sheet lenders have less capital to work with, but also because they are more conventional when it comes to accepting forecasts of increased profits.

How Does Balance Sheet Lending Work?

Balance sheet lenders need to buy their money in advance. The money comes from a number of sources that include family offices, investment banks and financial markets.

By the time it is ready to be disbursed to a borrower, it has gone through a lot of hands (mainly investment funds and money markets), with each clipping the ticket on its way through.

This makes the money pretty expensive for the balance sheet lender. Lenders will pass the cost of acquiring the money off to the borrower along with the margin they need to charge to cover any loan losses they are liable for.

This can lead to very high APRs for unsecured business loans – close to 100%. Before you get locked into loans with high APRs, speak with a Commercial Finance Network specialist to avoid overpaying for a much-needed capital infusion.

Balance Sheet Lending vs. P2P Lending: What’s the Difference?

We’ve covered balance sheet lending, but another category of lending comes in the form of P2P lending.

P2P, or peer-to-peer lending, is an alternative funding solution that allows you to borrow money from investors and individuals instead of financial institutions like credit unions or traditional banks.

Essentially, people with excess money offer to lend money to borrowers using online services. A P2P service, which is usually a website, is a central marketplace that facilitates funding arrangements by linking investors with borrowers (which is why P2P lending is also called marketplace lending).

To know which is the better option for your particular situation, it helps to know the major differences between them.

Here are the main differences between the two types of lenders.


  • Balance sheet: the cost of obtaining the money and the cost to cover operating costs and loan losses are passed onto the borrower. Prices can vary greatly.

The Funding Process

  • Balance sheet: once an application is approved, funds are readily available.
  • P2P: loans may be funded instantly or may undergo a funding period. In fact, P2P platforms are constantly struggling to balance capital supplied by lenders with the capital demanded by borrowers, which can lead to a funding period prolonged even further for borrowers.

How Risk is Structured

  • Balance sheet lending: the lender will carry all of the risk for any losses and must price to account for any losses. 
  • P2P lending: investors take on risk directly when investing in specific loans, which is why they diversify their risk across multiple loans.

Advantages of Balance Sheet Lending

There are a number of benefits that come along with getting a balance sheet loan.

  • Direct Communication with Lender

In the event that a problem arises, borrowers are able to speak directly with the original lender. With traditional financing, the original lender may sell your debt to a thirty party (collection company) and that third party may sell it to another company. This can make it very difficult to catch on your loan if you want to pay the outstanding debt because you’ll have to first identify the company holding your debt.

  • Easier to Manage

When your debt is sold to another company, repayment rules may change – again and again. It makes sense that working with a single lender will be easier for borrowers.

  • Reduced Risk

Borrowers aren’t usually required to place an item on the balance sheet because the item isn’t a liability or asset, thus minimising risk.

  • Rapid Company Expansion

Balance sheet loans are commonly used to help a company to expand quickly. This may be purchasing materials or labour, opening a new location or creating a new line of products. Sometimes costs arise quickly, no matter the projected budget, and a balance sheet loan gives smaller companies the ability to access capital to meet unexpected demands and benefit from future growth.

If you are still unsure if balance sheet lending is right for you, our team of Commercial Finance Network special advisers can help determine benefits you may be unable to see.  

Why Do Lenders Consider These High-Risk Loans?

Most balance sheet lenders are large investors and banks with a long history in their industry. These are the big players that have very deep pockets and are in a good position to hold the risk that a balance sheet loan demands.

Due to their holdings and size, these lenders can grow a large segment of these loans. Additionally, they may offer a huge amount of these kinds of loans to a wide variety of borrowers, helping to reduce their risk and increase security through diversifying.

Balance sheet lenders retain a loan for its lifetime, earning interest for the entire lifecycle of the loan. This increases the rate of return and provides lenders with long term, steady cash flow. A higher rate of return allows them to be more fluid with their lending and offer people in unconventional situations more opportunities for loans.

This is the reason why they don’t mind investing heavily in balance sheet loans: these kinds of loans will typically offer larger returns than conventional loans, making them a very sustainable and scalable type lending for investors and banks with a lot of money.

The Costs of Balance Sheet Lending

The costs are going to vary depending on a number of factors and while the upfront costs and interest rates tend to be higher than traditional financing options, think about it as renting money for a short period of time and the numbers will speak for themselves.

Non-conventional lending, like balance sheet loans, are good for those who have outstanding credit, have significant equity (or down payment) and are financially stable, but are facing a situation that is preventing you from qualifying from more traditional options.

It’s important to consult specialists, like those at Commercial Finance Network, to ensure you can cover costs and, in fact, get the best pricing structure possible.

How to Apply for a Balance Sheet Loan

Due to the fact that financial statements are a vital barometer of a business’s success, they are a key requirement for obtaining extra capital. You’ll improve your chances of getting a loan with bulletproof financial statements.

Your balance sheet shows what you owe vs. what you own and any shareholder investments. If your assets outweigh your liabilities, this is an indication of a strong fiscal position. A useful tool to help identify trends, develop strategies and capitalize on your company’s strengths and mitigate weaknesses, it is a useful way to understand your business’s stability, liquidity and worth.

Profit and loss statements should be in order as they show how your company is doing over time. For a loan application, you should have a forecast that outlines sales and expense projections for the next two years.

Lastly, your projected cash flow statement, or cash flow forecast, must be well organized as it is one of the most essential statements for helping secure a loan. If there’s a discrepancy between the rate at which cash flows into your business and the rate it exists, you may have a cash flow problem. Lenders will think you will not be able to repay a loan.

Though, this is just the beginning steps, preparing and maintain financial reports will go a long way in supporting your loan application.


Nobody wants to get stuck overpaying for a loan. When put into perspective, balance sheet lending is a short-term solution that gives you the chance to take advantage of long-term investment opportunities.

At the end of the day, this is the right decision for you if you are in a position to refinance out the loan in no more than 3 years and it makes financial sense. Every situation is different and everyone has their own financial goals so the best thing to do is review your scenario with experienced lenders that offer more than one type of loan. At Commercial Finance Network, our team of specialists can answer all your questions and walk you through the fine print. Fill out our short contact form or call us on 03303 112 646 and we can help determine what loan is best for you.