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What is a Credit Investor?

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  • Written By: Keith Koons
  • Edited By: Lauren Fritsky
  • Last Modified Date: 31 October 2016
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A credit investor is a person or a business that seeks to grant loans to the public and private sector for profit. In many instances, a credit investor is willing to provide capital in low- to medium-risk loans, but he also does so by defining terms that would be favorable to him if the venture failed. There is a standard formula that a credit investor uses to determine the creditworthiness of consumers and businesses, and different types of investors service the various industries. Banks and financial institutions are credit investors by definition, and the term also applies to credit card companies, private investors, and other alternative sources of lending.

The primary goal of any credit investor is to make a profit through lending. By granting a means of financing to an individual or a business, a credit investor assumes the risk that the debt will be repaid at regular intervals that are determined before the loan is granted. Since most of the inherent risk is placed on the credit investor, many types of loans are made with some sort of collateral involved. If the borrower were to fail to repay the loan as agreed, the investor would have legal recourse to take possession of the collateral.

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Most credit investors have a predefined formula for determining when to grant a line of credit. Once the applicant's credit history is reviewed and deemed satisfactory, the investor would study the loan request itself to determine the chances of being repaid in full. In a separate process, the collateral would be evaluated to determine what the actual worth of the item is, and that would factor into the equation as well. After each of the steps are completed, if the lender felt that the loan was a good investment, he would determine an interest rate that would apply to the repayment schedule.

There are many different types of credit investors as well. Some of them deal solely with secured loans that have very little risk involved, while others intentionally seek out consumers who have shown a pattern of struggling to repay loans. For those that deal with high-risk clientele, the credit investor often profits heavily from fees and other penalties at the start of the loan. Each type of lender would generate initial terms that would ensure that he could ultimately benefit from the transaction, even when the consumer or business cannot complete the repayment schedule as agreed.

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NathanG
Post 4

@allenJo - I know what you mean. Some companies in our area offer to lend money to just about anyone – “bad credit, no problem!” they shout. Of course it’s no problem because they front load a ton of interest and fees.

They need to make their profits in a hurry in case the debtor defaults. It’s a risky business, but at least you get a return on your investment faster, if you can stomach the stress of dealing with high risk borrowers.

allenJo
Post 3

@everetra - That’s true, but it involves greater risk. What if the IPO bombs or the company doesn’t do well? You are expecting a bigger return on that investment; you want a piece of the pie, so to speak. If things don’t work out well then you’ll be out of luck.

If you just offer a regular money investment, however, you set the bar lower; as long as the loan is repaid you are happy. In my opinion this is a much safer route to go. But of course not everyone is interested in safety. Some people want the highest yield possible.

everetra
Post 2

@MrMoody - Angel investors are the most ambitious of the investment companies out there. They function a little differently than a regular private investor in that they want equity in the company in return for the loans extended to business.

Sometimes this can make the angel investors very rich. Companies like Facebook were funded by significant angel capital investment and those investors get first dibs on Facebook stock and stand to get very rich in a hurry. If I had a choice I would be an angel investor. Getting equity in a company is much better than simply getting your loan repaid.

MrMoody
Post 1

A private but structured credit investor can be a good source of business loans when banks and other institutions fail. Banks tend to be very picky about whom they lend money to. They watch the economy very closely and if things are shaky they may hedge their bets when they issue loans; they may only loan to firmly established enterprises, not smaller businesses just starting out.

A private investor can fill in the gap and may be a little more lenient in collateral requirements in my opinion. You might want to check the small business administration or search online if you are looking for loan sources from a private investor.

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