In the business world, big dreams and hard work can only get a company so far. Companies, especially smaller and newer businesses, need financial support to successfully execute their growth plans. Yet these promising enterprises rarely obtain capital from traditional banking institutions, which favor established corporations. This is due in large part to post-2008 regulations that limit the risks banks are willing to take. Fortunately, alternatives exist, particularly through business development companies that are able to support small businesses via private credit funds.
Business Development Companies (“BDCs”), such as Saratoga Investment Corp., came into being after Congress passed laws in the 1980s to aid small to medium-sized enterprises attempting to secure loans. Also referred to as alternative lenders, BDCs consistently approve loans for growing businesses, energizing the middle market economy.
Growth in the private credit arena has skyrocketed in recent years, with $1.2 trillion handled by fund managers in 2021. Financial analysts at Preqin predict that number could reach more than $2.7 trillion by 2026. With that in mind, let’s discuss how private credit works and the advantages it provides.
What Is Private Credit?
In the financing world, private credit serves as an umbrella term for a number of loans issued by alternative lenders. This asset class includes useful tools for borrowers like senior secured loans, junior debt, mezzanine financing, subordinated debt, and more.
Private credit allows companies to access a slew of financing on short and longer-term bases. In turn, companies use such loans to finance growth or fund acquisitions. Private lenders offer significant flexibility, loan tailoring, transparency, and quick turnarounds when it matters most for small businesses. Currently, 9 out of 10 middle-market companies receive financing from alternative lenders rather than banks.
Advantages
Investors are always seeking new ways to generate capital while supporting exciting endeavors. The flexibility and resilience of private credit funds, especially throughout the early pandemic years, make them incredibly appealing for this purpose.
Borrowers have many incentives to seek loans from private credit funds. For starters, the approval rate for small to medium-sized enterprises is much higher in the private sector. Alternative lenders tend to consist of small advisory teams, meaning borrowers are more likely to speak to an actual person about their loan options — including senior subordinated loans, collateralized loans, and mezzanine financing. Private credit funds have the freedom to take risks on burgeoning companies and are often willing to negotiate interest rates and repayment structures. The approval process at most private lenders is also quick and uncomplicated, allowing borrowers access to funds whenever growth opportunities come along. Finally, borrowers are able to retain control of their company.
Pursuing Your Private Credit Fund Options
Private credit funds offer a unique opportunity for lenders and borrowers in the modern age. In fact, the past two decades have seen the total assets under the management of private credit funds increase by 25 percent each year.
Private credit funds provide emerging companies with the tools needed for success in an ever-evolving market, but finding the right investment path can be tricky when so many options exist.
If interested in learning more about your private credit fund options, consult Saratoga’s investment profile to see if your company might benefit from our services and expertise.