You Better Pay, Or Else – Not Any Longer – Private Credit

Written by James Sanders

Over the last few weeks, we discussed private financing options for companies that are typically in growth mode.  You may have heard about the rise of “private credit” investing or lending.  No, I am not talking about “payday” or “Tony Soprano” loans where if you don’t pay, the consequences could be dire.  So, what does “private credit” mean? 

Private credit is debt financing provided by non-bank lenders directly to businesses.  This form of lending has grown significantly, as traditional commercial banks have reduced their lending to companies due to tighter regulations and an increase in risk aversion.  When a company goes into this process, it is very similar to applying for a loan at the bank.  However, there are key differences: 

• Source of Funds – Private credit funds are non-bank entities that raise money from institutional investors (e.g. high net worth individuals).  Traditional lenders (e.g. commercial banks and credit unions) lend funds from customer deposits.
• Regulation – Private credit lending is less regulated and provides more flexibility in loan structuring.  Traditional lenders are far more heavily regulated by institutions like the Federal Reserve and the FDIC. 
• Lending Process – Private credit lending typically has fewer steps to gain approval (e.g., it is subject to a lending committee approval).  Traditional lenders have numerous steps and are far more risk averse. 

As with all forms of private investment, each has its advantages and disadvantages.  The bottom line is that if a company brings this type of capital into its capital structure, these new investors (or partners) will expect growth and returns.  If you don’t perform, it is more likely than not that you,  as the owner, will no longer be the owner (and no, I don’t mean that they send someone out to collect with their favorite Louisville Slugger). 

Whatever financing you pursue, be sure you consult your professional business advisors.