By Lou Wallace
Historically a first tier lender has been an institutional lender such as a Bank or similar company which falls under the regulatory agencies such as the FDIC or Federal Reserve. The rates of interest they charge are almost always tied to Prime, or to the Libor rate of interest. The interest charged is at quoted rate plus a factor which can be as high as 4%. An example would be if the rate was agreed to be the prime rate, you would take that rate and add 4% to it which would get you your annualized interest rate.
The second tier lender is usually a company which does not fall under these regulatory agencies. In some states they are regulated by the state banking laws. But all second tier lenders are restricted to lending to businesses and are restricted from making any type of consumer loans. All of the loans are secured by collateral and almost always personal guarantees of any owners of more than 20% of the stock. Interest rates are usually tied to the prime rate but the rate which is added on rate is higher than a Banks because of the additional cost of doing business.
The final tier is usually an individual or individuals who lend money but are quite often interested in one particular industry or type of collateral. The terms from these lenders tend to very high interest rates and low loan to value ratios.
In the current banking economy few first tier lenders are actually making loans. Therefore the second tier lender is acquiring a larger market base as companies who traditionally would have secured first tier financing are only option is to obtain financing with the second tier lenders.
That being said, one has to ask themselves if a lender who is not making loans can be considered a 1st tier lender. Likewise if a commercial finance company is lending money in this economy can they still be looked upon as a second tier lender when they are the only segment of the business community that is lending money.