Niche Business Lenders Rising Fast

A new source of capital for small to medium size business borrowers involves little-known finance firms called BDCs or business development companies

. As banks pulled away from lending to these businesses after the financial crisis, private equity firms stepped up their creation of these companies that make loans to small and medium size businesses.

Their rates are much higher than a bank but well worth it when you cannot get financing from a bank this according to Howard Harper CEO of a 20 million dollar print and press supply firm with its headquarters in Danbury Connecticut. I tried several banks for a recent acquisition but untimely had to turn to a BDC for the capital I needed to get the deal done say Harper.

These lenders are not always easy to find as they tend to cater to their existing book of accounts. Most of them are divisions of large private equity firms such as Blackstone Group, KKR & Company and Carlyle Group LP. Some of them are publicly traded firms that stand alone such as Ares Management LLC or Stifel Nicolaus & Company.

Yes they can be expensive says David Golub President of Golub Capital which manages a $417 million dollars in publicly traded BDC but BDCs can be much more flexible with terms and conditions and the speed in which we can commit to closing a deal. However regulators are concerned that the upfront fees, which can be as high as 10%, arent always fully disclosed to investors. In addition, they say brokers dont always report changes in the value of the loan portfolios.

Most BDCs trade on public exchanges without upfront fees, but a growing subset, sold through brokers who collect upfront fees, doesnt trade. Regulators are focused on the non traded BDCs.

Non traded BDCs disclose their fees and the value of their loan portfolios in SECC filings, but brokers selling them often dont reflect that information in clients account balances, according to regulators.

The Financial Industry Regulatory Authority is preparing a change to its rule governing non traded BDCs that will require brokers to report the net asset value of the investments, which would reflect both the upfront fees taken out and changes in the value of BDC loan portfolios.

The changes will provide investors with a better understanding of how much they are paying to be in the investments and help warn them if BDC investments start to lose value.

Andy Ross Is President of MyHardMoneySchool.com and Author of Think outside the Bank

by: Andy ross

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