Securing financing for small businesses in the United States has changed dramatically from what it used to be. Historically, a small business owner has had two main choices. One is to attract investors, and the other is to ask banks for a loan. However, the financing landscape is changing, and more and more small business owners are seeking alternative sources of financing: private credit.
Private credit refers to loans provided to businesses by institutions other than banks. In the past decade alone, the private credit sector's assets have seen an impressive increase from $400 billion to $1 trillion. Some of the biggest private equity firms are expanding their private credit operations, and investors ranging from pension funds to family offices are increasing their exposure to the asset class.
Despite its growing appeal, private credit is not a new entrant to the financial world. Since the late 1970s, small businesses have turned to private credit when they cannot qualify for loans from traditional banks or when they need more capital than banks can provide.
I've heard from small business owners how private credit positively impacts their businesses, employees, and communities. To name just a few, the founder and CEO of an early childhood education company recently told me that private credit allows him to offer his employees better health insurance, retirement security, and other benefits. It is said that it has become.
You also now have access to experts who can guide you on how to scale and address your business challenges. “[Business owners are] We're looking for someone to talk to about how we can be better and how we can improve our operations. “That's certainly something private credit and our partners have given us that opportunity to do,” he said.
Both companies and investors are increasing their interest, and the impact is clear. EY estimates that in 2022 alone, private credit supported an estimated 1.6 million jobs, generated $137 billion in wages and benefits, and $224 billion in GDP. Small businesses in all 50 states benefit from private credit. Importantly, most of them are small businesses with revenues of less than his $100 million.
Naturally, as with any booming sector, as the private credit industry grows, so do calls for stronger regulation. In this case, it is essential to consider the current environment and the wider impact that industry overregulation has on small businesses.
Some critics want to subject private lenders to similar requirements and regulations as banks. These misguided calls do not take into account the significant differences between private credit and traditional bank lending, particularly the fact that private lenders do not use customers' deposits. To obtain a bank loan. Private lenders are also addressing several risk mitigation characteristics that are inherent to private credit business models.
In particular, private credit has no “run risk” because investors commit funds for a long period of time and cannot withdraw their investments all at once. This is part of the reason the Federal Reserve has set out its recent policies. Financial stability report Assuring the sector's stability, it said: “The financial stability vulnerabilities posed by private credit funds appear to be limited.” Federal Reserve Board researchers also recently found that private equity-backed loans carry lower credit risk than comparable non-PE-backed loans.
Private equity and credit companies are properly regulated by the U.S. Securities and Exchange Commission (SEC). Private credit companies are generally subject to SEC registration, SEC on-site inspections, comprehensive compliance programs, and periodic reporting of assets and business information to the government, among other requirements.
Elected officials on both sides of the aisle would likely agree that private credit is a vital resource for America's small businesses. Small businesses need more access to capital, not less. Washington should embrace the way the industry provides financial stability and facilitate the flow of capital from investors to American companies. Policies should provide access to finance, not impose unnecessary rules or barriers.
The consensus among many in the financial industry is clear. As is, the system serves its intended purpose. Banks continue to lend. Private credit investors, on the other hand, lend to companies that are not eligible for loans or need additional support. This sector is more than just an alternative form of investment for SMEs; it is fundamental to their stability and ability to grow.
Drew Maloney is Chairman and Chief Executive Officer of the American Investment Council (AIC). AIC is a leading advocacy and resource organization created to develop and provide information about the private investment industry and its contributions to the long-term growth of the U.S. economy and retirement security.American workers.
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