Attracting financing in a deteriorating interest climate

The rise of private credit

With rising interest rates and inflation, it has become more difficult to secure a bank loan. Due to higher interest rates and the fact that European banks have been more cautious in lending since the financial crisis, we have seen a rise in private credit. While the volume of private credit was USD 800 billion in 2019, Moody’s predicts this will grow to USD 2 trillion by 2027.

Private credit investors are often willing to lend much larger amounts to companies, and are subject to fewer regulations than banks. They seek returns on their investments and are thus less risk-averse, although this comes with higher interest rates.

Why private credit?

Private credit offers the advantage of investors’ increased willingness to finance companies that may not qualify for bank loans. The flexibility of private credit allows entrepreneurs to explore custom solutions that better align with their unique business needs and goals, based on expertise in specific sectors or industry segments.

Additionally, private credit benefits from shorter “Know Your Customer” (KYC) processes compared to the banking sector. For many clients, the KYC process at banks can be frustrating because of the amount of required information and time needed for an application. Banks are working to automate KYC processes, but recent research demonstrates progress is slow.

Attracting private credit

For entrepreneurs for whom a bank loan is not an option and who need quick credit, various alternative financing options are available. Several direct-lending platforms provide financing offers within 24 hours. However, it is important to note that the interest rates for such loans are generally much higher than those of banks, which is the main disadvantage of private credit.

Private credit offers a wide range of financial solutions for businesses. Factoring involves selling outstanding invoices to a specialised company to obtain immediate liquidity. There is also the option of a “sale and leaseback” arrangement where companies can free up capital by selling their assets and then leasing them back. Another financing structure is “asset-based financing”, where a company uses its inventory and equipment as collateral to raise capital.

Mezzanine financing is another option. The most common structure for this is unsecured, subordinated debt. Mezzanine financing is fundamentally the same as a subordinated loan, the main difference being that mezzanine debt typically involves equity participation. Mezzanine loans are only repaid after all other loans have been repaid.

Conclusion 

Private credit is growing in popularity as an alternative source of financing for companies. This is mainly due to rising interest rates and reduced lending by European banks. Private investors are willing to lend significant amounts. For businesses, private credit can be a good alternative form of financing.

Private credit offers alternative financing options such as direct-lending platforms, factoring, asset-based financing, and mezzanine. These financing structures can provide a quick solution. However, a major disadvantage is that interest rates are generally higher than bank loans. On the other hand, private credit offers a solution for companies where a bank loan is not an option, or where specific financing needs play a role.