A lot of changes have occurred since the most recent financial crisis and among them is the fact that it has become extremely hard for small companies and other startup companies to get traditional loans from banks. This is mostly due to several bad investments made over the past few years, totaling over $400 billion depleted from the banks’ figurative vaults. An example of the sour economy is a marked decrease in banks that still offer buy to let mortgages, lowering the income potential of land developers, house owners, and real estate investors. It’s been a really bad situation and the smaller companies suffer from capital loss as a result. In desperation, these startups have started to turn to hedge fund loans.
Recent years have shown an incredible increase in the amount of companies who have decided to take up a hedge fund loan. Unlike bigger companies that can wait out the capital to profit cycle which should, theoretically, balance things out, smaller companies risk going completely under and filing for bankruptcy if they don’t have anything to supplement their operational costs.
Hedge Fund Warning
Despite their name, hedge funds don’t actually use ‘hedging’ to control risk. Evidenced by not even having a standard definition, hedge funds have problems with regularization as they’re mostly privatized investor clubs for very rich people. This wild card element is even more apparent with how the very act of throwing your lot in with them means that you’re either very wealthy yourself or very desperate. Traditional loans are already at 2% – 3% above prime loan rates and hedge funds go beyond even that. Their rates are ridiculously high and they stand to gain a lot from the ongoing crisis.
Hedge funds have suddenly become one of the biggest lender markets around.
Hedge Fund Factors to Consider
Hedge fund loans are asset-based loans. This means that the loans are backed by the company’s assets. These assets can be anything from properties and inventories to accounts receivable. They cost a lot more to pay off than traditional loans and the assets put on the line will be more thoroughly scrutinized than normal. Such is the standard for these kinds of loans that hedge fund due diligence may even be enforced physically, that is inspection of the assets by the hedge fund representatives themselves.
What’s even more of a kick from hedge fund loans is that every six months the loan may incur new arrangement fees according to the loan managers. The hard part is that these arrangements are hard to govern as most hedge fund investments are so large that they don’t fall under many investment and loan regulations.
When thinking about taking a hedge fund loan, remember that they will cost your company a lot of money. Huge yields are the biggest draws for most hedge fund lenders. Like money market loans and mutual fund loans, hedge fund loans should always be the last resort. This is a very risky and very gutsy thing to do. Unless you’re absolutely sure that there are no other avenues for getting a loan, avoid the great costs of a hedge fund loan.