What Is Net Lending?

Net lending is a type of financial strategy that identifies the amount of resources that a government or a business has to invest in various types of lending operations after covering all necessary expenditures. Determining this amount calls for identifying all types of revenue that are taken in by the entity, then subtracting all expenditures related to that period. The amount that is left is the total of the net lending, or the total amount of financial resources that are available for use in some sort of lending operation.

Since net lending represents funds that are above and beyond the amounts needed to keep the business or government in full operation, this means that the funds can be used in various types of investment activities. For example, a company may choose to take a portion of these extra funds and buy bond issues as a way of generating some interest income in the future, without taking on a great deal of risk. In like manner, a nation that has taken in a great deal of tax revenue and requires only half of that amount to cover all operational expenses may choose to invest a portion of that net lending in bond issues associated with other countries, or even invest the funds in bond related to building projects that will enhance some aspect of the nation’s infrastructure.

Typically, a company or government will have specific guidelines and regulations in place that provide a framework for utilizing net lending for various purposes. This may include limiting the percentage of those excess funds that can be used for a single project, or possibly even placing a cap on the amount of those net funds that can be used for any type of investment or lending activity. The idea of having guidelines in place is to prevent the entity from investing too heavily in any one area, and possibly increasing the risk of loss that could impair the ability to cover basic expenses in a later period.

Along with companies and governments, households can also generate net lending. In this scenario, money that is not required to balance the household budget or to pay tax obligations can reasonably be referred to as net income. That income could easily be used to allow the household to buy a bond issue or even invest in some sort of lending activity that is likely to produce some sort of interest income at some point in the future.