The term “stakeholder” has gained popular use in the past decade, but the principle behind the term is as old as capitalism. A stakeholder is an entity or individual that has an interest in the success of a project. While that interest may be moral, sentimental, or familial, more often than not, it’s financial.
This is why you often hear the term in a business context. Managers have a professional interest in the success of their projects. Investors have a financial interest in the success of their investments. And of course, shareholders have an interest in the financial success of their company.
But some stakeholders are less direct. A family friend may be a stakeholder in the happiness of the family. One of the most common shareholders (and strangely one of the least discussed) are the people and institutions that provide debt — lenders.
A lender is an external stakeholder because it has a financial interest in the success of the project for which it has lent money, as the repayment of its loan and interest depends on that success.
In this article we’ll look at types of lender stakeholders, the 8 most common types of stakeholders, and the distinction between external and internal stakeholders.
Types of Lender Stakeholders
Lender stakeholders provide debt financing to a project, which is in most cases a company as a legal entity. Most people think of a bank when they hear “lender,” but there are 7 types in all:
- Traditional lenders – those that are strictly regulated by federal and state governance
- Banks – big, national, technologically-advanced, and strict credit entities
- Credit unions – smaller, local, customer-oriented, less expensive, and personable credit entities
- Alternative lenders – non-institutional and non-government backed people and organizations
- Online lenders – creditors without brick & mortar branches and ATMs
- Peer-to-peer lenders – individuals lend money to other individuals via online platforms
- Crowdfunding – individuals pool money for a specific project in exchange for a cheaper version of the product once launched
- Family – loved ones
- Friends – loved ones
All of these lenders provide money towards a project. With the exception of family and friends, they all expect a minimum return on investment — their financial interest in the project.
Lender as External Stakeholder
At a high-level, we can define stakeholders as internal and external to the project. Internal stakeholders are those that have a direct influence on the project and can steer it towards success. Common examples of internal stakeholders are department managers, C-level executives, and even subject matter experts in the company who want a project to succeed to advance their career.
Lenders are external stakeholders. They do not have any operational control over the business, and in most cases they do not have the requisite knowledge to bring value to the project. However, they have a vested financial interest in its success.
How Lenders Influence a Business as External Stakeholders
Though they don’t work directly on a project, a lender can nevertheless influence its direction. How? By placing limits on the funds they provide.
Lenders often structure their loans as rolling credit facilities with specific KPI targets in place to prevent over-borrowing. In addition, they may require the authority to approve or modify the financial business plan of the company, which consists of its financial statements.
By controlling the flow of funding to the company, lenders influence the direction of projects. This influence is distinct and different from the control internal stakeholders implement, i.e the strategic delivery of products or services to its customers.
How Lender Stakeholders are Affected by a Project
It’s easy to see why lenders have a financial interest in a company — they want a repayment of loan principle and interest. However, they often have other kinds of interests. These include reputation interest, insider interest, networking interest, and M&A interest.
Reputation Interest
Big banks don’t need to market themselves — they’ve been around so long that their names carry enough weight to maintain business. Smaller banks, however, need to build a reputation in order to grow.
This need for a reputation may push them to engage in high-risk/high-reward funding opportunities, which may involve high-growth companies that could put them on the map. Moreover, it pushes them to pull for the success of specific projects with high visibility, whether or not they are highly profitable.
Insider Interest (Conflict of Interests)
In some cases, a decision-maker in a bank may have a personal reason to vouch for lending to a project. For example, a bank manager may have invested personal money into a startup as an Angel investor. But his/her money alone was not enough to make it profitable.
To support the company into success and see a substantial ROI on his/her personal investment, the bank manager may approve a loan to the company. While this is heavily frowned-upon, in the case of private companies, it is not illegal.
Networking Interest
Networking interest is similar to reputation interest. By lending to companies in specific industries, they get access to a network of potential clients. An example of this strategy is banks wishing to enter the IPO underwriting sphere. Until they have completed a successful IPO, it’s difficult to sit at the table, so they make take on riskier underwriting projects to get a foot in the door.
M&A Interest
Lenders may want to get involved in funding potential M&A activities. In these cases, they may decide to provide funding for a project whose success would lead to a big M&A transaction. Once they’ve earned the confidence of the company by providing traditional funding, they can offer their services as lenders in a leveraged buy out (LBO) or other acquisition-funding mechanism.
8 Other Types of Stakeholders
Other than lenders, there are 8 types of stakeholders. Each belongs to the internal or external bucket, giving it either a direct or indirect influence over the business.
| Stakeholder | Internal or External | Description of interest |
|---|---|---|
| Owner | Internal | Financial interest in success |
| Employee | Internal | Depend on the company to pay their salaries |
| Customers | External | Depend on the quality of the products purchased |
| Suppliers | External | Depend on the company as a client |
| Investors | External | Depend on the company for ROI |
| Trade union | External | Depend on the cooperation of the company to stabilize the industry |
| Government | External | Depends on the company to comply with laws |
| Community | External | The entirety of these actors depend on the company for well-functioning of the group |
Conclusion
Lenders are external stakeholders because they have a financial interest in the success of the project for which they lend money, as well as potential reputation, insider, networking, and M&A interests.
Though they are just one of many external stakeholders, lenders retain the highest ranking right to to liquidated assets in the case the company becomes insolvent. This adds all the more importance to their financial interest.
