Table of Contents
1. definition of "direct lending"
Direct lending is the direct granting of credit by private or institutional investors to private individuals (direct consumer lending or direct personal lending) or to companies (direct corporate lending), i.e. outside the banking sector.
In direct lending, the capital is provided by the own funds of one or a few investors.
Marketplace lending, peer-to-peer lending or crowd lending is also a form of direct lending.
2. Importance of Direct Lending
Tighter regulations for banks in the wake of the financial crisis and their high administrative costs continue to lead to a decline in the supply of business loans. In contrast, demand is growing, especially among small and medium-sized enterprises. As more and more money flows into this area, higher loan amounts can be granted. This in turn leads to increased interest on the part of borrowers, which in turn leads to a growing need for investment. As a result, the number of participating players will continue to rise in the coming years, and with it the volume of lending via direct lending.
3. Direct Lending from the Investor's Perspective
The lenders are mostly wealthy individuals or asset managers. It is not uncommon for asset managers to set up funds for investing in direct loans, through which diversified investments are made in the loan projects.
Direct lending is very attractive for investors thanks to its easily calculable risks and the possibility of broad diversification. In addition, investments in direct loans often enable higher returns in times of low interest rates.
4. Direct lending from the borrower's perspective
The borrowers are usually small and medium-sized enterprises. But private individuals also make use of this form of borrowing.
In addition, direct lending offers companies the opportunity to expand their own financing to another source and thus become more independent of only one lender.