What to do after you loan money to a private business

We financed a scrap metal dealer once that needed additional working capital to purchase and process scrap because it had high cost overruns in building its large-scale shredding operation. 

Let’s just say that experience is everything, and you can learn from ours.  

Numerous lenders already were providing equipment financing with broad claims on the company’s assets – so we couldn’t use that collateral to support our note.  Consequently, we created an off-balance sheet structure, a single purpose vehicle (“SPV”).  This new company would purchase scrap, the dealer would process and sell it for the SPV, and the SPV would repay the investors their principal and interest, with the remainder delivered to the dealer as a processing fee.

The loan’s term sheet stipulated that the value of the collateral must remain high enough to support payments to the investor lenders.

The Challenge: Unfortunately, our borrower, the dealer, began to assess higher values to the collateral than had been originally agreed.  By doing so, he thought he could request more new scrap than the outstanding loan could support.  The real problem, ultimately, was that the dealer was not sufficiently profitable.

Actions Taken: CFG denied the dealer’s request and required a return to the original collateral levels.  When the dealer refused to comply, CFG began to pay off investors using the free cash flow retained by the SPV.

Result: CFG investors received a 98.7% return of their investment (i.e., they lost 1.3% of their principal).  However, the others, the on-balance sheet lenders, reportedly received only 33% of their loan principal when the dealer declared bankruptcy.

After offering our debt investments, CFG typically acts as Administrative Agent for our investors who participated as part of a syndicate, or group of individual investors.  All CFG’s investors are both “High-Net-Worth” (meaning that, at a minimum, they meet the Accredited Investor standard), and we have determined them to be “suitable” for such higher risk investments, i.e., they have an appropriate risk/return outlook and the investment matches their other investment selection criteria.  However, many of these investors may not have the time or experience needed to administer adequately all the elements of their loan investment. 

We remain engaged because we have learned, over time and through challenged transactions, that it is critically important to: 

  • Continually monitor the Issuer’s performance; 
  • Coordinate communication among the participating investors; and
  • Where necessary, respond quickly and aggressively to defaults by enforcing the investor protections built into a given security’s credit structure. 

CFG’s investor support includes actions identified below.  You should be prepared to take the same steps yourself if you are lending independently.

  • Processing interest and principal payments to investors;
  • Looking for patterns by the borrower of pushing the limits of “grace periods” after the time in which payment is otherwise due to the lender/investor;
  • Monitoring collateral and other loan covenant compliance, receiving ongoing third-party verification whenever possible;
  • Quickly engaging legal counsel qualified in litigation and the local bankruptcy courts when there is the first sign of trouble.

We try to protect our investors throughout the life of the investment (the investment’s “Full Cycle”).  When defaults occur … and they will from time to time … we have consistently found that an immediate and aggressive response leads to the best ultimate outcome for the Investor. 





In the interest of accessibility, here are some terms that any investor should be familiary with.