Wall Street is trying to counter tighter rules on high-risk loans, reported the Wall Street Journal last week, by debuting their specialty lender backed by Goldman Sachs Group. Companies like Goldman and Credit Suisse Group have created specialty lenders they call "business development companies" that give the firms easier access to fund loans to small businesses with little or no credit, one of the fastest growing segments of the U.S. market.
Large financial firms have had to bend to regulators' rules since the financial crisis that restrict their ability to make higher risk loans, all in an effort to avoid repeating the events of 2008. Therefore, these private equity firms have relied on BDCs to push ahead with nonbank lending options.
Some lawmakers are looking to relax the restrictions on BDCs by allowing them to increase the amount of debt they may amass. Of course as a BDC--a publicly traded company--rows, their dividend yield grows as well, making them risky, but attractive to investors.
The Difference between a BDC and other Non-bank Lenders
BDCs are publicly traded closed-end funds that make investments in private or public companies. The purpose of their investment is to increase the capital and, therefore, the value of the company. Companies who are supported by a BDC either relinquish a degree of ownership or they receive a bond at a fixed rate, repaid over a period of time.
Non-bank lenders are financial institutions that extend loans or credit, typically to businesses rather than individuals. Non-bank lenders or alternative lenders, like BDCs, are able to offer capital to higher risk small businesses and startups than traditional banks. Often they do not require collateral, such as a percentage of ownership in the company, and offer more flexibility in repayment options.
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