Commercial lending has been a part of human culture since the dawn of recorded history. While it inevitably began as one neighbor loaning money to another, over the centuries banks gradually came to monopolize this activity. That all changed in 2008.
After the Great Financial Crisis, increased regulation and tighter lending standards caused large banks to dramatically curtail their lending to small businesses. Without a ready source of credit, Main Street grew starved for capital. Sensing this need, a handful of tech-savvy companies began lending directly to small business by using digital, online lending platforms built around greatly improved underwriting methods. Through this technology, Main Street is now able to obtain the capital it needs faster and cheaper. Private lenders, in turn, are able to generate consistent, high-yield income by lending capital directly to small businesses.
The way we see it, our fund is functioning like
its own private bank, except without the hassle
of actually being a bank.
Our strategy capitalizes on this development by investing in high-quality loans made by these sophisticated, private lenders. We have designed this strategy with a focus on minimizing risk to principal to make it a viable income alternative. It is founded on the age-old concept of private lending to small businesses, something banks have been profiting from for generations. However, with the benefit of radically improved borrower assessment technologies, we are able to execute this traditional lending model with greater efficiency and improved credit analysis.
In general, we look for loans that are short-term, small in size, and guaranteed by the personal assets of the borrower. Our loan portfolio is broadly diversified by geography and industry, consisting of doctors, dentists, hotels, restaurants, gas stations, convenience stores, and other businesses you might see on Main Street. We do not use any financial leverage in this strategy.
Taken together, the following three characteristics establish the definition of an excellent income investment, and from the start we designed our credit fund so that it would possess these qualities.
Because this is private lending, there is much less government regulation to clog up the process. Efficiencies like this, and the ones created by using digital technology, allow investors to generate much higher returns than they would on other income investments. We currently target returns of 7%-9% per year, net of fees.
We have engineered a high level of liquidity into our system, allowing investors to redeem their capital much faster than many other income investments. We do this by keeping the length of the loan terms very short.
By investing in an area with historically low default rates, and by focusing on personally guaranteed loans made to quality small businesses, we are able to provide our clients with a high-yield investment that has less volatility and risk to principal than other income products.