“Philadelphia: First Bank of the US” via Wally Gobetz
A recent Seeking Alpha article asks, Are Business Development Companies Better Than Banks? As the CFO of a BDC, you might think my answer would be a resounding ‘yes.’
However, ‘better’ is rather subjective in this sense, which is why my answer is maybe.
In an overarching explanation, the article makes great points that BDCs are indeed in a position to provide higher quality financing to the middle market. Its additional points that point out banks face new requirements and regulations that forced some to exit some asset classes, while some BDCs can take on larger transactions, certainly demonstrate the optimism many in the sector feel. However, when it comes to individuals and businesses the answer isn’t as clear.
On the business side, both a BDC and a potential portfolio company need to scrutinize the deal they are about to enter into. In some cases, the BDC may opt to not acquire a business that appears to pose too much of a risk to its portfolio. If a company’s earnings, stability, market evaluation and future performance fail to show its proven record and potential, a BDC will likely choose to not add a company to its portfolio. Conversely, a business owner must evaluate if their business is ready, or in the need, for BDC investing. There are certainly tons of advantages for both sides, but investment might not be the best option every time.
Getting back to the Seeking Alpha piece, the article clearly lays out the growth potential of the sector, to which I agree, but I hope my points help those unfamiliar with BDCs that the term “better” is a loose descriptor for all parties involved. If you and your business fit the mold to invest or join a reputable BDC, do so by all means. However, if you go in without understanding all the criteria and risks, you could be doing more harm than good for your venture. In short, BDC investment requires thorough risk assessment prior to making the plunge into the space.
Once it becomes clear that you are ready to invest or forge an agreement with a BDC, I do believe that you will find that a BDC is better than banks in several facets that the Seeking Alpha article lays out quite well. Regardless of what route you eventually take, the best way to determine the ‘better’ option for your money and/or business comes down to research, analysis and patience to make the correct decision. With the proper steps taken, you will make the best decision for your venture.