Private Debt Loans: Financing for the Mittelstand

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Private debt loans have been enjoying ever-increasing popularity since 2016, especially among SMEs.

Private Debt Credit vs. bank

The bank consultant is currently still the first point of contact for many SMEs when it comes to money. If the house bank used to be firmly in the saddle, then it has to expect head wind now, because there is competition. We are talking about private investors , who are becoming increasingly popular with medium-sized companies.

Loans from private investors

Money from private investors is more expensive than that from the house bank. We do not have to fool ourselves. But obviously the higher price is also offset by one or the other advantage, which allows medium-sized companies more and more to think about a private debt loan. As a result, it is increasingly common for private investors to supplant banks as corporate lenders and to enter into business with SMEs.

Institutional investors for growth capital and acquisitions

Financing through private investors – private debt is the technical term here – is a form of financing in which institutional investors lend money to entrepreneurs over the long term. Institutional investors, for example, are insurance companies or pension funds .

Private Debt Credit: Less regulation

Financing via private investors is usually handled by an investment company . The bank loan differs from a private debt loan by the possibility to negotiate the repayment individually. The entrepreneur can thus adjust the rates of repayment according to timing and scope exactly to the circumstances that result from his investment. This may also mean that he only repays the entire loan at the end of the term.

Private debt loans differ in another point from a bank loan. While bank loans currently cost about 2 to 3 percent interest , the interest rates of the former are up to 10 percent . This is the price of flexibility in repaying the private debt loan.

No banking license required for private debt loans

In 2016, the Federal Financial Supervisory Authority ( Bafin ) decided that providers of private debt loans do not have to have a banking license . This brought private investors out of the legal gray area . Previously, the granting of a loan by a private investor always involved the risk of being rated as a bank by Bafin. This would have meant accepting the standards of banking regulation .

Failure to comply with bank regulation in particular allows private investors to lend money that would not be worthwhile for a traditional bank. Overall, the market thus has more liquidity available.

For reasons of creditworthiness, SMEs think about private debt loans – or if they are looking for long-term loans, for example. Especially in the case of long-term loans, banks are no longer the first choice because they are becoming much more restrictive because of stricter regulatory requirements. The typical terms of the loans therefore differ.

  • Term Private Debt Credit : The term is usually between five and seven years.
  • Term bank loan : The term is usually between three and five years.