Key Takeaways
-
Private credit lending can help businesses access flexible financing options when traditional bank loans are unavailable.
-
Non-bank lenders often provide faster funding and customized loan structures but at a higher cost of capital.
-
Borrowers should evaluate the risks of limited regulation and short loan terms before choosing private credit financing.
The private credit sector has grown significantly over recent years, from approximately $46B in 2000 to quickly approaching $2T this year. Private credit lending, a subset of the private credit sector, is where non-bank lenders provide loans directly to businesses. Fintech companies, private lenders and peer-to-peer platforms are filling gaps left by traditional banks, offering new opportunities, but also posing risks to both borrowers and lenders.
In this article, we review the advantages and disadvantages of asset-based loans (ABLs) and term loans through non-bank lenders.
Benefits of Non-Bank Lending
- Greater Accessibility: Non-bank lenders often lend to borrowers who may not qualify for traditional bank loans. This includes small businesses, startups or individuals with limited credit history. It also includes established companies that are looking for additional liquidity from their collateral and/or have had recent less than ideal financial performance.
- Faster Approval and Funding: Compared to traditional banks, non-bank lenders usually have more streamlined application processes with less paperwork and quicker decision-making. Loans can sometimes be approved within days, making disbursement of funds quicker for urgent needs.
- Flexible Loan Structures: Non-bank lenders not bound by as many rigid regulations can offer covenant-lite loan solutions, customized repayment plans and innovative financing options such as invoice factoring or revenue-based lending. They can also be more aggressive with asset based loans (ABL), allowing more availability against collateral.
Challenges and Considerations
- Higher Cost of Capital: The higher risk taken by non-bank lenders will usually result in higher interest rates and fees than those of traditional banks.
- Limited Regulation: Non-bank lenders are not as regulated as traditional banks. And while most non-bank lenders have excellent reputations, borrowers may occasionally face unscrupulous lenders that provide less transparency, fewer protections against unfair terms and potential exposure to predatory practices.
- Short-Term Oriented: Many non-bank loans are structured for shorter durations. While this provides quick access to capital, the company will need to carefully manage cash flow and be mindful of the repayment/refinancing requirements upon expiration of the loan.
Beyond Lending: Other Services
Unlike traditional banks, non-bank lenders do not offer typical banking services (i.e., deposit accounts, payment processing, wire transfers and overall cash management systems) to help manage your business transactions.
The Bottom Line
Non-bank lenders provide faster and more flexible loans to borrowers that may not qualify for traditional financing. This could provide companies with more liquidity for their businesses. But the benefits will come with higher costs in interest and fees.
Contact Us
PKF O’Connor Davies stands ready to help borrowers weigh the pros and cons carefully and assist in finding the right lender to fit their financial strategy. If you have any questions, please contact your client service team or:
Joseph Marchese, CTP
Partner
jmarchese@pkfod.com | 201.788.0798
Patrick Diercks
Partner
pdiercks@pkfod.com | 941.232.4560