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Flexible private debt solution


There has been a lot of talk over the last year about the “new normality” and a growing sense that businesses will need creative thinking to make their way to recovery.

Finding new ways to survive and prosper may also require some innovative financial solutions, especially when taps on state-backed credit schemes are turned off. Interest in private debt as an alternative to traditional bank lending has already emerged. The latest figures from British Business Bank (BBB) show that even before the pandemic, private debt to UK businesses exceeded £ 18 billion in 2018 and 2019, and 62% of transactions during that time were made to support growth. Going forward, demand will probably only increase.

What is private debt?

Private debt is not new, but it is something small and medium-sized enterprises (SMEs) may not be familiar with, as it has historically been largely owned by large corporations, although this is now changing. Also known as direct lending, mezzanine finance or private credit, it is between traditional banking debt and private equity. It provides more flexibility than the standard bank loan terms offered, and at the same time is a suitable option for those who do not want to give up a significant share of capital, as would be the case with a private equity transaction.

Specialized providers can structure loans according to the specific needs of the business. This is useful in better times, but especially in difficult circumstances, giving management the opportunity to focus on doing business rather than on the burden of restrictive banking agreements or relentless repayment schedules.

For example, companies that want to finance their recovery path and want to be able to take advantage of growth opportunities as they arise may benefit from loans that require a one-time repayment at the end of the term. This allows them to use capital to service business needs rather than to pay off debt. Similarly, in today’s world it is harder than ever to pass rigorous tests, even for the best companies, as uncertainty creates an unprecedented burden on trade and budgets, and forecasts have to be revised several times. Loans with lighter agreement requirements can better meet commercial volatility, instead of increasing pressure. And unlike bank debt, private debt can also be used to meet a range of requirements, from raising capital to replacing bad debts, to financing the acquisition or change of ownership of a business, or even to releasing share capital.

Is it available for SMEs?

There are encouraging signs that SMEs are increasingly gaining access to this type of credit. A BBB study found that the average size of growth agreements over the period was £ 2.2 million, indicating that SMEs benefited – a total of around £ 1 billion. This is in line with what we see: demand in a smaller part of the market is increasingly being met by private capital supply as private investors seek new ways to diversify their portfolios.

Ultimately, credit solutions need to be attractive and affordable if they are to work for SMEs, and more and more businesses are recognizing that private debt can be both. This may not be the cheapest option, but by providing sustainable solutions that meet commercial requirements and reveal value, the goal is to provide a return to all stakeholders.

Today, more than ever, businesses need financing on terms that provide a solid foundation for success and support their future ambitions. For those who want to get finances that free them up rather than burden them, private debt may be a decision worth considering.

See also: The case of private loan funds

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