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Private credit generally offers more flexible terms than traditional banks. This is great for borrowers, but some private credit investors worry that these lending terms increase the risk of default, and they could end up losing their money.
It’s a fair concern. Private credit investing is generally riskier than public markets. Capital preservation and income stability depend on how well a private credit fund conducts its risk assessment to ensure it lends to the right borrowers.
At PSA Capital Investments, we have consistently delivered returns averaging over 8% per annum to our private credit fund investors. Let’s walk through the financial risk evaluation process we use to prevent defaults, protect investor capital, and ensure steady returns.
How Credit Risk Evaluation Protects Both Borrowers and Investors
Evaluating borrowers and only lending to those who are able to repay protects investor capital. That’s obvious.
But what about borrowers? Is loan risk evaluation just a necessary bother, or does it also help them?
While it might feel intrusive, financial risk evaluation is beneficial for borrowers as well for these reasons:
- It gets you better loan terms. If you can demonstrate that you’re a low-risk borrower and you have a secured asset, most private lenders will give you better terms.
- It prevents over-leveraging. If a lender gives you a loan that you’ll struggle to repay, they are putting you into deeper financial distress. Credit risk assessment protects you from taking on more debt than you can manage.
- A lender’s risk evaluation can provide an external perspective on your business, revealing weaknesses you may not have realised. An assessment might show that your cash flow is not as robust as it should be or reveal market risks you missed.
What Risk Evaluation Involves
Loan risk evaluation covers several aspects of your business’s financial and operational landscape. The main areas we assess include:
Credit assessment
A loan evaluation process usually starts with a credit check for the business and its owner(s). It also includes an assessment of your business and personal credit history with a particular focus on timely repayments.
A credit assessment also checks for existing loans, as that can affect how much you qualify for.
Business cash flow and structures
To ensure a business can service a loan, we analyse its profitability, available free cash flow for loan repayments, and consistency.
We can offer flexible terms that fit businesses with unusual cash flow patterns, such as rural farmers who rely on harvest cycles. But we still make sure that a business is in a position to service their debt.
We also review business structures, including ownership and operational structures, to identify risks that could affect loan repayment or recovery in the event of a default.
Collateral assessment
Because we require security backing for all our loans, we assess the collateral to ensure it provides adequate backing and retains its value over the loan term. We also assess its liquidity, or how easily it can be converted into cash if loan recovery is necessary.
Analysis of external factors
There are many external factors that can affect a business’s ability to repay a loan. This is why we also assess the market and competitive environments, the legal landscape, and regulatory compliance.
Measures that PSA Takes to Prevent Defaults
Loan risk evaluation, on its own, is not enough to prevent defaults. We take extra measures to further reduce the risk that borrowers will default on their loans, such as:
- Only lending to businesses, which pose a lower risk than consumer lending.
- Offering fair and friendly loan terms to borrowers, making it easier for them to repay their loans and exit faster; a win-win for both borrowers and investors.
- Requiring asset backing of at least 160%, ensuring full loan recovery even if there’s a default.
Start Investing With PSA
The PSA private credit fund is a low-risk investment for defensive investors seeking steady income. We deliver higher returns than many other private lenders while prioritising the safety of your capital.
Our fund is open to sophisticated and wholesale investors. Give us a call at (03) 9847 7689 to start investing with PSA. bo
Disclaimer: The information contained in this document is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs.
