Risk of Using Direct Lenders and Brokers
There are a number of risks associated with using direct lenders and brokers, which you
need to be aware of when sourcing any form of credit. The relationship between direct
lending and loans means being able to source, underwrite and monitor an investment. This
is not a small workload, this is a demanding workload, which overwhelms clients.
The risks associated with using a direct lender and broker include the inability to establish
a sourcing pipeline, and increasing competition for direct lending deals. Working with firms with
large origination platforms and powerful deal sourcing has an advantage over using direct
lenders and brokers.
Direct Lenders Amplify the Return on Their Investment
Direct lenders often amplify the return on their investment, as a result, there is a leveraged
refinancing risk. Direct lenders sometimes demand quick repayment, especially when the
value of the direct lender’s portfolio is decreased, this magnifies the risk to the client.
Do Not Complete Proper Due Diligence
Another of the risks of using direct lenders and brokers, is that they fail to complete proper
due diligence. Direct lending does require extensive research, often associated with
private equity transactions. They need proper staff and resources, but they don’t always
have the sector specific expertise.
Failure to Structure Investments Properly
The direct lenders that do not have sector specific expertise or a narrow mandate, lack
creativity and flexibility to adapt to their borrowers needs. This makes it harder to seize the
right opportunity or design the best financing structure. Many of the direct lenders do not
have the necessary resources to address regulatory concerns, taxes and legal aspects in
order to set up a bespoke structure.
Failing to Navigate Restructuring
Companies with limited experience is challenging economic environments lack the
necessary skills needed to identify the warning signs of distress. They do not have the
financial knowledge to help a company return to a good footing, maximising the recovery
of the investment.
Do Not Sustain an Active Management System
Direct lending requires continuous monitoring of any investments, which requires
experience, resources and dedication. This ensures that any problems are addressed in
the early stages. Not all direct lenders have this ability, which makes this a high risk to
Borrow With Less Investor Protection
With a low interest rate environment, investor appetites for risk adjusted returns have been
secured through direct lending. This has enabled companies with weak balance sheets to
borrow money without investor protection. This has also put a risk of private investments,
enabling borrowers to dilute lenders call protections, which is expected to increase if
interest rates increase in the future.
In addition to this, finding a loan for any business takes time, especially if you are going
through a busy period. Working with a direct lender or broker often helps speed things up,
but in order to benefit, it’s essential to shop around and do throughout research in order to
secure the best financial product for your brand.
Rate Comparisons Can Be Overwhelming
Further, direct lenders often offer a range of loan conditions and interest rates to assist you
in finding the best match for your business, but at the same time, it can make comparing
loans overwhelming. The best option is to not rush into any loans, do your homework in
order to ensure you find the best deal.
Trust is Important
Traditional lenders have built up their customer trust over years with strict regulations,
which give customers complete confidence when using their services. Direct lenders do
not have the customer loyalty and trust you find with a traditional lender. As a result due
diligence and having trust in the company you are dealing with is important when making
any loan decisions.