In a world of diverse investment options, private credit has emerged as the preeminent private asset class, capturing the attention of astute...
A Simplified Guide to the Complex World of Private Credit Investing
This guide explores the challenges faced by businesses when securing finance and the benefits that private credit can deliver.
While private credit investing isn’t a new financing option for businesses, it’s rise in popularity in recent times has caught the attention not only of businesses, but also investors looking to secure strong regular income returns.
To understand why, we first need to understand the challenges faced by businesses when securing finance and the benefits that private credit can deliver different.
The borrower’s dilemma
Securing finance to expand operations can be a challenge for any type of business, great or small. Many businesses struggle with insufficient liquid funds to support their growth initiatives. As a result, they fail to capitalise on potential expansion, acquisitions, or innovation projects, hindering their ability to reach their full potential.
However, there are a number of specialised financing options offered by non-bank lenders that are designed to meet the needs of borrowers who fall outside a bank’s traditional lending criteria, including:
- Invoice finance
- Livestock finance
- Equipment and machinery finance
- Property backed finance
1. Invoice finance
Australian small to medium (SME) manufacturers who supply goods to large, well-established companies are often at the mercy of having their payment terms dictated to them by the purchaser. When these terms are unfavourable to the SME, it can materially impact the growth rate of the SME.
With invoice financing, the SME can receive between 70% – 80% of their invoice value, removing the delay in revenue from the sale date. This allows the SME to reinvest the capital in further production and growth initiatives.
2. Livestock finance
Prudential regulations that govern the banking system in Australia prevent banks from utilising security other than property, such as livestock, for loans to Australian farmers. This can significantly impact their ability to purchase more livestock and expand the productive capacity of their farming operation.
To solve this challenge, livestock financiers can advance a portfolio of the purchase price of livestock, freeing up the farmer's capital so they can purchase more livestock. Security is then taken over the financed livestock, in addition to corporate and personal guarantees over the farming business and its directors, which often includes the land assets of farmers.
3. Equipment and machinery finance
Most companies won’t pay cash upfront to purchase equipment or machinery. Instead, they look to spread the cash outflows related to the purchase along the useful life of the equipment or machinery.
That’s where equipment finance can help. It lets the SME use a much smaller capital investment upfront compared to buying equipment outright. The equipment or machinery financed by the SME borrower is registered as collateral for the loan and subject to re-possession by the lender should the borrower default. This advantage of this type of finance is that it lets the SME utilise the equipment straight away.
4. Property backed finance
When presented with a growth opportunity that requires substantial capital outlay, many SMEs find themselves in a situation where the sum of their liquid funds falls well short of the mark. That’s where property backed finance emerges as a viable solution.
In this model, a lender will help the SME unlock the equity contained within their property assets. The lender secures the loan via a mortgage on the property, typically up to a 75% LVR, and provides the borrower with the necessary capital to execute their growth initiatives.
The trusted name in private credit
Aura Private Credit partners with best of breed non-bank lenders who provide Australian SMEs with specialised funding solutions. Our strategies specifically finance pools of loans originated and managed by these lenders via securitisation warehouse facilities. Here, we co-invest alongside both domestic banks, investment banks and other institutional investors.
Our underlying investment philosophy is to drive active strategies that provide strong regular income returns, while maintaining a strong focus on capital preservation through deal structuring, asset backing, diversification and portfolio construction.
You can request the full guide to private credit investing here.
Director of Private Credit
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