Did you know that in 2023, banks rejected 80% of all small business loan applications? If you received a rejection letter, you are not alone. Access to credit is essential for running a successful business, especially when customers delay payments or unexpected expenses arise.
This is where private credit becomes a valuable resource, allowing you to secure essential funding without facing the daunting rejection rates of traditional banks. The commercial lending landscape is witnessing a monumental shift, with private credit providers emerging as the pacesetter in delivering scalable trade financing solutions in competition with conventional credit providers. In this article, we will examine the fundamentals of private credit, its growing appeal as an alternative to conventional financing, and tips for finding the right private credit lender.
What is Private Credit?
Private credit refers to financing options provided by non-bank lenders. Unlike loans from traditional financial institutions, private credit is not traded on public markets, meaning your loan will not be sold to third parties. Instead, private credit is typically funded by individual investors and family offices who prefer to lend rather than purchase equity. Through Capital Source’s participation platform and network of vetted syndicates, clients can access private credit from a consortium of accredited investors and family offices.
The structure of private credit loans is similar to that of traditional loans, featuring a defined repayment term, interest rate, and loan conditions. However, private loans often offer greater flexibility in negotiating terms. For instance, you may have the option to select balloon payments with prepayment discounts instead of monthly installments or to extend the loan duration through reconciliation adjustments. Such flexibility is not always available with bank loans because their loans must conform to pre-determined ratios (e.g. SBA 7a Loans). As a story-driven private lender, Capital Source aims to provide flexible credit accommodations that align with the growth stages of its clientele.
Why is Private Credit Gaining Popularity?
Since the 2008 Financial Crisis, private credit has seen significant growth, expanding tenfold since 2007 and projected to reach $3.5 trillion by 2028. Several factors contribute to this trend:
– Economic Uncertainty: During uncertain economic times, banks tend to tighten their lending criteria, increasing the likelihood of loan application rejections—even for businesses with adequate collateral.
– Rigid Bank Policies: Traditional banks often impose strict terms that may not align with the operational needs of small businesses. For example, if a bank requires adherence to specific debt covenants, it can limit your ability to make strategic financial decisions, such as factoring receivables or obtaining additional equipment loans for growth.
Finding the Right Private Credit Lender
Choosing the right private credit lender is crucial for your business’s financial health. Here are key factors to consider:
– Service Offerings: Assess the range of loan options available. Look for lenders that provide tailored solutions, such as equipment financing, inventory financing, cash flow loans, inventory lines of credit, or revenue advances. A lender with diverse products can better meet your specific needs.
– Experience with Small to Medium-Sized Businesses: It is advantageous to work with lenders who have a proven track record in financing small and medium-sized enterprises in your industry. Be sure to ask for references. Such lenders typically understand the unique challenges of these businesses, making them less risky partners compared to industry-agnostic lenders.
In the ever-evolving landscape of commercial lending, the ascendancy of private credit as a dependable source of liquidity is increasingly filling the void for small and medium size enterprises. At Capital Source, we specialize in helping growth-stage businesses access private credit solutions by understanding their unique set of circumstances and success drivers. When traditional credit sources such as banks say “no”, we say “YES”. Contact our team today to schedule a free consultation or apply now. We want to hear your story and align with your business’ growth objectives.