Direct Lending 101: What You Need To Know

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Direct lending is a growing subset of the private debt market. It gained traction after the financial crisis as traditional lenders pulled back from middle-market financings.

Investors see the benefits of direct lending:

  • High yields
  • Low correlation with public markets
  • A variety of flexible terms and structures

However, they also face some challenges.

Faster Approval

Direct lenders can review and approve business loans much faster than traditional financial institutions. They can do this by using fintech to dig deeper into the business and its financial history to determine if providing funding is a good idea. In addition, they don’t have to go through a third-party intermediary. As a result, you can get the money you need quickly. Also, the loan approval process is fast – sometimes, you can receive an offer in less than 24 hours. Another advantage of direct lending is that it doesn’t require a large down payment. This can be very helpful for small businesses starting out and with little capital to invest.

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Higher Interest Rates

Direct lending (DL) is a subset of private debt markets focusing on first-lien quick loans to middle-market companies. The industry exploded after the financial crisis as commercial banks and business development companies (BDCs) pulled back from middle-market debt, leaving BDCs and a handful of private direct lenders to fill the gap.

MaxLend states direct loan investing offers investors attractive, contractual risk-adjusted returns with lower volatility and mark-to-market risk than more liquid credit strategies such as broadly syndicated leveraged loans. However, DL managers must have extensive deal-sourcing skills and strong underwriting expertise to execute their risk/return expectations.

Higher Risk of Scams

Lenders frequently send you unsolicited emails with loan offers after you complete an application online. These emails are called lead aggregators and could leave your personal information vulnerable to scammers. If you receive these messages, it is best to disregard them and not respond.

Direct lending has grown rapidly since the financial crisis. Unlike banks, it isn’t subject to strict institution-wide financing regulations. As a result, direct lenders are better positioned to offer middle-market businesses highly flexible loans without rigidly adhering to leveraged loan guidelines. Investors are drawn to direct lending because it generates high-yield premiums over a diversified portfolio of corporate bonds and higher-yielding treasuries. But the illiquidity of these investments and the need for independent valuations to mitigate credit risks can pose challenges for investors.

Experienced managers have proven the ability to navigate these tradeoffs through thoughtful loan structures and rigorous risk-adjusted return calculations. They also focus on leveraging a deep network of relationships to assess underlying investments’ quality and risk profile. Some of them check informative sites like MaxLend reviews for convenient assessment.

Shorter Loan Term

Direct lending is a form of debt financing that bypasses financial intermediaries, such as an investment bank. This allows it to offer more attractive risk-adjusted returns than traditional debt investments. It also provides borrowers with flexibility that traditional lenders cannot offer. Moreover, direct lending can provide faster access to cash for businesses that need it quickly. This is because most non-bank creditors have a streamlined application process that can be completed online from any location and at anytime. The application can be submitted on any device, including smartphones and tablets.

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