In a financial environment where many middle-market companies are struggling for financing, Yieldstreet Private Business Credit is excited about the opportunity to lend to a swath of growing businesses that otherwise may struggle for access to capital.
In this Q&A, we caught up with Larry Curran, Managing Director of Private Business Credit, and Barbara Anderson, Senior Director & Head of Underwriting for Private Business Credit, to take a closer look at one of Yieldstreet’s newest asset classes and explore the concept of Private Business Credit.
Before we jump into Private Business Credit (PBC), let’s take a step back and look at Private Credit. In general, Private Credit is a loan to a non-public company where the debt is not issued or traded on the public markets.
Private Business Credit targets the ownership of higher-yielding corporate, physical (excluding real estate), or financial assets held within a private structure, which can include: long term consumer and commercial receivables, inventory, equipment, and other business assets.
Although Yieldstreet’s Private Business Credit asset class will look at underlying collateral that includes consumer-facing, our borrower (or seller of assets) will be commercial. Essentially, we are B2B. We’re able to lend directly to a borrower or participate with originators, specialty finance companies, banks, or institutions in senior secured financing facilities.
Yieldstreet PBC looks to issue single and multi-tranche term loans secured by specific underlying assets, the cash flow from which directly repays the principal and interest.
The difference between Private Business Credit (term loans directly related to assets pledged as collateral), and Specialty Finance Companies (such as small ticket leasing, and commercial or consumer loans to non-bankable or sub-prime customers) is determined based on the relative financing need and credit quality of the end-user borrowers.
For example, Yieldstreet Private Business Credit would not provide a single loan to an individual to purchase a car; however, we can buy a participation in a pool of a thousand consumer automobile loans originated by a specialty finance company. In this example, we would rely on the specialty finance company’s licensing (in the case of consumer loans), their underwriting expertise, and their collection capabilities. In a situation such as this, we often would require them to have equity behind us in the transaction. Ultimately, we want our borrowers to have alignment with us and capital at risk in every transaction we do.
On the other hand, Yieldstreet Private Business Credit can provide a $5 million term loan to a commercial business acquiring a new generator for their manufacturing facility. This sort of term loan transaction would typically be too large for most specialty finance companies. A specialty finance company, for instance, might lend to 10 different small businesses looking to buy or lease $500,000 back-up generators. In this instance, Yieldstreet Private Business Credit can offer a $4 million participation in the $5 million pool of 10 leases originated and serviced by the specialty finance company.
When Yieldstreet Private Business Credit acts on an opportunity, we are always secured by collateral and cash flows sufficient to pay current interest, and may also amortize all or a portion of the principal of the initial term of the loan with any remaining balance due at maturity.
Today, we are not a revolving credit lender, instead, we provide term loans specifically secured by certain assets of the business. The repayment of our term loan will come from the natural liquidation of the assets in the ordinary course of business or the cash flows generated from the growth capital that we provide to the borrower. With us, there is always a clear path to the repayment of principal. In addition, private credit has other risk mitigants that can be incorporated into our loan terms as well.
In an asset-backed transaction, repayment is exclusively tied to the cash flow or liquidation of the underlying assets; however, in an asset-based loan, repayment is tied to the business operations of the entity, which includes cash flow from operations as well as rotation of debt, capital raises, or asset sales.
Asset-based loans are often used to bridge working capital shortfalls or short-term timing differences between revenues and expenses and these revolvers increase and decrease daily, weekly, or monthly. Asset-backed loans are term loans whose amortization is tied to the underlying sale, liquidation, or amortization of the assets pledged to secure them. Asset-based loans ebb and flow whereas asset-backed loans are made and amortize over time, they rarely increase.
There has been a disruption in the capital markets that has left growing, middle-market companies scrambling for financial alternatives. During a crisis, alternative lending tends to boom somewhat because the traditional banks become defensive and typically lend only to the best credits.
Many of the opportunities in our current pipeline have exhausted all of their existing capital to grow yet still have unmet demand. When evaluating these opportunities, there are a variety of factors we take into account. Some of these include whether the business is growing regardless of the COVID-19 crisis, the historical performance of the business, the sophistication of their technology, access to capital in addition to our loans, and whether their management team is poised to capitalize on an opportunity if the right capital structure is put in place.
We are looking at a variety of different business types, including manufacturers, distributors, retailers, and specialty finance companies such as commercial equipment lessors, and consumer installment loan companies.
In Private Business Credit, what is most important is not the type of business but the quality of the collateral pledged as security and our ability to structure a term loan that provides safety, security, and current income for our investors, as well as growth capital to our borrowers.
As our borrowers grow and establish strong performance track records, they will earn the ability to increase and extend their term loans for additional periods of time with us at a lower cost that is commensurate with their reduction in risk. This allows us to offer fully secured, diversified, long-term investments enabling both our borrowers and investors to build trust and extend their mutual lifetime experience on the platform.
In a crisis like the one we find ourselves in now, our investors still need current income and predictable rates of return, while our borrowers need a reliable source of capital to support their growth. America, as a country, is sitting on trillions of dollars in cash. Despite the uncertain situation the country finds itself in today, the ability to balance investors’ needs for predictable, current cash flow with our borrowers’ needs for reliable capital, priced to enable growth, is exciting.
At Yieldstreet, we are excited to provide the power of our digital wealth platform for investors to facilitate investments that are intended to directly help growing American businesses, in exchange for current predictable income. Our goal is that building long-term relationships with both investors and borrowers using secured lending products offered on our platform will help enable Private Business Credit’s assets under management to grow by adding new borrowers as well as organically growing loans to existing borrowers year over year, extending their lifetime value to the platform.
For any additional questions about Private Business Credit, please contact us at [email protected].
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Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.