Private Lending: Underwriting = Risk Evaluation

The low interest rates offered from U.S. Treasury and public bond markets are increasing private lending among investors looking for greater returns on their fixed-income investments. At the same time, smaller companies (SMB’s) must turn to other financing sources to fill the void left by commercial banks who have largely retreated from SMB lending.

Credit analysis by any type of lender, remains an essential part of making a loan.

Participants in the expanding market – “direct private investment” – must appreciate the many facets of extending credit. It starts with determining the credit strength or weakness of the borrower.  This “underwriting” process is a highly specialized skill within any lending institution.  Individual lenders should acquire at least a basic understanding of credit analysis before they start investing in private notes.

This Carofin White Paper outlines the major considerations for evaluating both a corporate borrower’s credit strength and the loan terms the related debt investment offers.  The work sheet in the back will help guide less experienced investors’ analyses in identifying factors to consider.

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INVESTMENT TERMS

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