You are currently viewing Beginner’S Guide To Direct Lending: What It Is And How It Works

Beginner’S Guide To Direct Lending: What It Is And How It Works

Due to the higher interest rates, direct lending is becoming more popular. Direct lending provides an easy and accessible way for both investors and borrowers to obtain financing without having to go through a traditional financial institution. Direct lending involves giving credit directly to small and mid-sized businesses that use the money for expansion. Direct lending is a great way for businesses to get the capital they need quickly.

Keep reading to learn how direct lending works, the different types of options and companies on the market, and how to potentially benefit from it. It’s worth taking the time to understand how direct lending works, it’s a great way to access fast and flexible financing.

Direct Lending: An Overview 

Many banks stopped lending to lower and middle-market companies in favor of large corporations after the financial crisis. The sluggish economy and new regulations made it difficult for private companies to get loans.

Direct lending is a strategy in which non-banks make loans to companies while avoiding the middleman. Companies have more options for financing their operations as a result of this new method of lending. Similar to private equity, non-bank lending involves raising funds from outside investors. Non-bank lending is an attractive option for companies due to its ability to provide fast access to capital with less restrictions than traditional lending.

Direct lending is appealing to many companies. Direct lending allows companies to access funds quickly and with less hassle. Direct lenders don’t have to meet strict lending qualifications. Direct lenders often offer more flexible loan terms. It is easy to build capital structure through direct lending. It can result in significant cost savings compared to traditional lending options.  

Direct lending is expected to remain in high demand for a long time. It is possible for businesses to have fast and affordable access to capital. It is an interesting option for investors who want to inject capital into other businesses. Exposure to a variety of different asset classes and industries could provide attractive returns for investors.

The Role Investors Play 

In order to finance private loans, investors issue capital to third-party fund managers or platforms. They get a share of the profits generated by the loans. Capital may be drawn from business development companies and asset management firms.

When you issue funding as an investor, you can help fund part or all of a loan with the goal of earning strong and consistent returns from higher-than-average interest rates.

There are some fees to consider. Before signing an agreement, it is important to be aware of the fees. An incentive fee is calculated based on the fund’s performance over time. The incentive fee is usually shared between the fund manager and investor. When working with a direct lender, investors may have to pay a management fee. The management fee is an additional cost that can be considered when making an investment.

To understand the various fees that will come into play throughout the loan, you need to read a fund’s prospectus. Before making any decisions regarding the fund, you should speak to a financial advisor or other professional. If you decide to take your capital, watch out for exit fees. If you decide to end the agreement early, it’s important to read and understand the contract so you know what you’re responsible for. When selecting a direct lending provider, pricing should be a big factor. Before making a final decision, you should thoroughly research the provider’s reputation and customer service track record.

How Direct Lending Works

Direct lender raises money from a network of investors and partners. The money is used to fund loans that are serviced by the direct lender. After securing funding, the lender will approach a potential borrower. The offer will be reviewed by the borrower, who will make a decision on whether to accept or reject it. If you are new to this term, a leveraged loan is simply a commercial loan funded by multiple investors. A variety of assets such as real estate, inventory, or other non-cash assets are used as security for a loan.

There are three ways a direct lender may offer a loan to a borrower:

1. First lien 

The borrowers agree to pay off the loan before they pay off the other debt classes. In the event of a default, the lender agrees to be paid back first.

2. Second lien 

Paying off a loan is required after a claim on a property.

3. Unitranche debt 

Senior and junior debt combine into a single loan with a mixed interest rate and a predictable repayment schedule with a unitranche agreement. This type of financing is popular with larger companies.

Is direct lending the same as private debt?

An asset manager sells a loan to investors. The asset manager tries to make sure that the investors get a good rate of return on the loan. A single investment bank funds the loan in a private debt arrangement. The investment bank sells part of the loan to other investors.

Distressed debt and other types of financing are included in private debt. Private debt can be used as an alternative to traditional credit markets, where companies can access capital more quickly and efficiently.  

How to Invest With Direct Lending

There are two ways to start a direct lending investment strategy. The first is to invest in individual notes, the second is to invest in a fund that pools investor capital and invests in multiple notes. You can either work with a direct lending provider who handles the process end-to-end or source borrowers yourself using a peer-to-peer lending service. Before making a decision, make sure to thoroughly research the risks and benefits.

Working with a direct lending provider 

Partnering with a direct lending provider is the most common approach. Businesses need capital to grow and thrive, and this approach can help them access it. Again, it requires paying fund management and incentive fees. The fund manager can make investments on your behalf and offer financial advice. The tradeoff is that management teams handle the entire process of vetting and managing the relationship. It is essential for protecting the lender’s interest in the loan that this is done. You don’t have to do anything as the investor provides funding. You will get a share of the profits in return.

Top direct lending providers for 2021

Direct lending opportunities for investors are offered by the following companies. Before committing to a direct lending opportunity, it is important to research and compare different providers. To determine eligibility, be sure to check with the provider. You can contact the provider to learn more about any restrictions that may apply.


Apollo launched Apollo Strategic Origination Partners in 2020. Over the next three years, the platform aims to provide $12 billion in finance to help meet corporate demand for direct origination.


Blackstone offers loans that are privately originated, senior secured, and with floating rates to middle-market companies across the U.S. and Europe.

Blackstone also recently announced Blackstone Private Credit Fund (BCRED), a non-listed business development company (BDC) offering individual investors access to private credit through a continuously offered fund structure.

Oaktree Capital 

Oaktree is a leading alternative investment management firm with a long history extending back to 2001. The company issues senior and junior loans to a wide variety of companies. Competitive interest rates and flexible repayment terms make the loans an attractive option for businesses.

Intermediate Capital Group

Intermediate Capital Group (ICG) invests in senior secured and subordinated debt instruments for companies throughout Europe.

Investing through P2P

The other option is to use P2P investment service providers.

Crowdsourced P2P lending makes investing faster and easier than working with fund managers. P2P lending can be used to invest in businesses that would not normally be accessible to individual investors. A robust platform that matches you directly with individual investors and business owners is what most P2P direct lending apps have. The ability to access funds quickly and securely is provided by this.

Before making a decision on whether to invest in the organization, you can typically access a variety of metrics. You can use these metrics to understand how the company is performing and whether they have the potential to be successful in the future. You can usually fund a portion or all of the investment when you find a match. It’s important to do your due diligence once you’ve found a match.

It is important to check with the platform before getting started as P2P providers have different eligibility requirements. Before committing to an investment with a P2P provider, it is important to understand the risks.

Top P2P providers 


Peerform offers attractive and steady returns and advanced analysis. The platform is for institutional investors that invest on behalf of their clients. It is a way for these investors to access high-quality investment opportunities that may not be available on the public markets.


Prosper is a leading P2P app. Users can easily access a variety of loan options with competitive interest rates and flexible repayment periods. It is one of the more accessible solutions for beginners, with a minimum investment of just $25. It has features and tools to help investors make the most of their investments.


PeerStreet is another great P2P platform that exclusively serves the real estate market. The platform can connect you with real estate entrepreneurs who need financing. You can invest directly in real estate loans. Investing in real estate loans can help you lower your risk.

PeerStreet is not a direct lender. It is a secondary market for loans from other lenders. These loans are typically sold at a discount, providing an opportunity for investors to earn a return.

The Pros and Cons of Direct Lending for Investors 


  • No regulatory restrictions = more flexible for investors and borrowers 
  • Investors can access higher interest rates 
  • Potential for strong, consistent returns 
  • Eliminates traditional intermediaries 


  • Unregulated lending increases risk for investors 
  • Potentially high early termination fees
  • Riskier than traditional investing  

Top Direct Lending Books to Explore

Private Debt: Opportunities in Corporate Direct Lending by Stephen L. Nesbitt

Private Debt: Opportunities in Corporate Direct Lending is a great resource for investors who are considering exploring this strategy. If you want a crash course in private debt, give this a read. Private debt can offer attractive returns for those willing to take on the risk, and can be a great way todiversify an investment portfolio.

Private Capital Investing: The Handbook of Private Debt and Private Equity by Robert Ippolito

Private Capital Investing is a manual on private equity and private debt. If you want to learn how professional analysts look at investment opportunities, check out this book. Gaining new insights into the world of investing is a great way to hone your skills.

Peer-To-Peer: P2P Lending For Beginners! How to Profit & Build Wealth With Small Loans by Charles Zone

P2P Lending for Beginners is a great introduction to P2P lending, including investing guidelines for beginners.

Frequently Asked Questions

There are a lot of questions about direct lending. This information has helped us understand the basics of direct lending.

What is EBITDA?

Earnings before interest, taxes, depreciation, and amortization are known as EBITDA. The profitability of a company can be determined without taking into account financing decisions, tax strategies, and other non-operating factors. One of the most important things to consider when issuing a loan is the company’s overall financial performance and profitability. It is one of the factors that determines whether to invest in a company’s stock.

A lot goes into a company’s performance. Before issuing capital and agreeing to a loan, it is important to see the entire picture. Before taking any action, it’s important to consider all the risks and benefits.

Is direct lending for short-term investments? 

Most businesses have access to direct lending for short-term financing when transferring ownership, completing a buyout, or bringing a new product to market. Direct lending can be used to finance mergers and acquisitions.

Direct lending is the fastest and easiest way to access capital to fund these types of projects, which is why the strategy is becoming more and more popular among small and medium-sized organizations. Direct lending is a great option for businesses that are looking for an affordable way to access capital.

Is direct lending risky for investors?

Direct lending is no exception. Both fund managers and companies have double risk. The potential for poor returns can make investing a risky endeavor, and investors should always consider the associated risks before investing. Poor fund management is one of the reasons why investors lose money with direct lending. It is important to research the fund managers you are considering investing with, so that you can make an informed decision about whether they have the expertise and experience to manage your money effectively.

There is never a guarantee when it comes to investing. It is important to understand the risks associated with investing and make educated decisions. It is important to thoroughly research a fund before issuing a loan. Investing can be risky, so it’s important to understand all the risks before making a decision. As an investor, you need to have a clear understanding of your risk tolerance and avoid putting in more money than you can afford to lose. It’s important to research thoroughly and make informed decisions when investing.

The Bottom Line

The direct lending market is something that investors should be aware of. The debt market is risky. Before making any decisions, investors need to carefully consider the risks. There are opportunities in this asset class. It’s an exciting time to be investing in this asset class, and the potential rewards are great. Direct loans could potentially lead to strong returns. The risks associated with debt financing options can be significant.

Make sure you conduct a financial gut check before you start issuing these types of loans. To ensure you have enough capital available to extend credit to your customers, you need to take a close look at your cash flow, liquidity, and current accounts receivable. Gain a high-level overview of where your various investments already exist by running through your investment portfolio. You can use the overview to figure out what types of investments you should add in the future.

Your portfolio is carrying a lot of risk. Too much risk can be harmful to your financial goals, so it’s important to assess and manage the risk of your investments. Expanding into a new asset class makes perfect sense for your strategy. It’s worth considering other options if you decide that staying within your asset classes is the best course of action.

This type of lending is just one of many investing strategies to consider. Before you make a decision on whether this type of investing is right for you, you should do your research. As you push toward financial independence each day, you should build a well-diversified portfolio. You will be able to reach your goals despite the ups and downs of this journey.

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