Of course there's a need for a lender, even at a microsecond transaction you do need funds to perform arbitrage, it's not just all theoretical funds - there's backing to them.

Else let's all just pretend trade on a real market until it collapses and just make sure they come a-knockin' on some non-existent firm...

Plus my conjecture, from my understanding, is the flash loan terms incentivise fast payback, whilst still retaining some fixed profit.

Akin to a credit card which has an effective 0% rate of you pay back within a certain time frame, but raises to 30% monthly after that.

I'd be happy to provide you with a flash loan at 0.001% fixed rate of profit for me/cost for you for the first 5mins and scare you with a 30% rate calculated every minute after that. For some pre-validated huge sum I know your business can be liable for, of course.

Which allows capital scarce firms to leverage these micro-loans on fast arbitrage opportunity where they should take any transaction that provides anything larger than that 0.001% in transacted profit. And let's them compete with larger firms on optimising pricing.