When you invest in a private credit fund, you are not buying a yield. You are buying a credit team’s judgement: hundreds of decisions about who gets a loan, on what terms, and against what security. The yield is the price of that judgement.
Most investors never see that process. They see a target return, a monthly distribution and, occasionally, a write-down. This article opens the credit file. It covers what a disciplined SME lender looks for before it lends, why each test matters to the capital behind the loan, and what to ask your manager to find out whether it is actually applied.
1. Cash Flow Comes First
Loans are repaid from cash, not from assets. Security is what a lender falls back on when the cash stops. It is not the plan.
A credit team starts with historical operating cash flow. That is what the business has actually generated, after tax, after existing debt service, and after the working capital it needs to keep trading. The question is how much new debt that cash can carry, with room to spare.
The warning sign is a loan that only works on the forecast. Every borrower has a forecast. A lender that sizes a facility to projected earnings rather than demonstrated earnings is underwriting the borrower’s optimism. When the forecast misses, the gap lands on the fund.
You Might Also Like : Private credit risk management
2. The Business, And The People Running It
Financial statements describe the past. The credit team also has to judge whether the business will still be standing at the end of the loan term.
That means testing customer concentration, contracted versus discretionary revenue, supplier dependence, industry conditions and competitive position. One customer at 40% of revenue is a single point of failure, however good the accounts look.
It also means assessing management: whether the owners have run the business through a downturn, and whether they have delivered on past plans. Management quality is hard to measure and easy to overrate. A good credit team treats a persuasive founder as a risk to be tested, not a mitigant.
3. What The Money Is For
Every loan needs a defined purpose and a defined source of repayment. Equipment, a specific acquisition, working capital tied to a contract, a refinance of an existing facility: each can be assessed, because the lender can trace how the capital turns into the cash that repays it.
A request for general liquidity is different. It often means the business needs money to cover a shortfall it hasn’t explained. That is not an automatic decline, but it demands a much harder look.
Refinancing deserves particular scrutiny. The question is not only why the borrower is leaving its current lender. It is whether that lender is leaving them.
4. Security: What It Is Worth When You Need It
Security matters in the scenario nobody plans for: the borrower has stopped paying and the lender has to recover from assets. At that point book value is irrelevant. What counts is what the asset fetches in a forced sale, net of enforcement costs, after anyone ranking ahead has been paid.
Three questions drive the assessment.
- Value. A disciplined lender advances against realisable value, not book or replacement value, and discounts for how liquid the asset is. Specialised plant sells at a steeper discount than a fleet of trucks.
- Ranking. First-ranking security means the lender is paid first from the proceeds. Second-ranking means recovering from whatever is left. That difference often decides whether a default is a delay or a loss.
- Perfection. Security over personal property (equipment, vehicles, inventory, receivables) must be registered on the Personal Property Securities Register. An unperfected security interest can vest in the borrower on insolvency, leaving the lender unsecured. Registration is not paperwork. It is the security.
Receivables deserve a specific note. Rixon classifies trade receivables as tangible assets. They are identifiable, verifiable against invoices and customer records, assignable, and convert to cash on a contractual timeline. Their quality depends on the debtors behind them, so assessing receivables means assessing the borrower’s customers: concentration, ageing, disputes and dilution.
You Might Also Like : SME private credit fund
5. Structure: Protection Before Default
Security protects the lender after default. Structure protects it before.
- Guarantees. Director and personal guarantees are standard in Australian SME lending. They tie the owner’s interests to the lender’s and add a second source of recovery.
- Covenants. Financial covenants (cover ratios, leverage limits) and undertakings (no further borrowing or asset sales without consent) are early-warning triggers. They give the lender the right to act before a problem becomes a loss.
- Reporting. Regular management accounts, debtor ledgers and compliance certificates show deterioration as it happens, not at year-end.
- Monitoring. Underwriting is a point-in-time judgement. The quality of a loan book is decided by what the manager does over the following years.
A loan with strong security and weak covenants can sit in quiet distress for months before anyone acts. Investors usually find out when the valuation moves.
6. Why These Borrowers Pay More Than Bank Rates
Private credit borrowers pay more than bank borrowers. Investors should understand why, because the reason determines what they are being paid for.
Some borrowers pay for speed, flexibility or structure a bank won’t provide: a facility settled in weeks, an asset class outside a bank’s credit policy, a transaction that doesn’t fit a standard product. Their credit risk can be comparable to a bank borrower’s.
Others pay because a bank declined them on credit grounds. They are riskier, and the margin is compensation for that risk. Both are legitimate loans. The problem arises when a fund markets the first and books the second. A manager should be able to tell you why each borrower isn’t with a bank.
How Rixon Applies This
Rixon Capital lends to Australian SMEs, with facilities from $1 million to $20 million. We do not lend for property development or property investment.
The Rixon Income Fund is a senior secured strategy. Every loan must be secured by first-ranking tangible asset collateral, including equipment, vehicles and receivables. Borrowers must pay interest in cash every month. A borrower in difficulty therefore shows up as a missed payment, not as a growing loan balance.
- Facility range (1M–20M) and whether New Zealand lending is current, against the IM and website.
- Which strategies (working capital, asset finance, cash-flow lending, bespoke situations) sit in the Rixon Income Fund versus the Rixon Credit Opportunities Fund. Add one sentence on the RCOF if it is mentioned at all.
- The security package on cash-flow loans (GSA, guarantees, ranking), so they are not read as unsecured.
- Whether property held outside the business is ever accepted as additional security. If so, state it as additional security only.
You Might Also Like : Loan book diversification
Questions To Ask Your Manager
- Do you size loans to historical cash flow or to forecasts, and what headroom do you require?
- What share of the book is first-ranking secured, and what sits behind each loan?
- Do you value security at book, market or forced-sale value, and how much do you advance against it?
- Is every security interest registered on the PPSR, and who checks?
- What guarantees and covenants are standard, and how often have you enforced them?
- How often do borrowers report, and what triggers intervention?
- Do all borrowers pay interest in cash, or is any interest capitalised?
- What are your largest single-borrower and largest industry exposures?
- How many loans have you worked out, and what did you recover?
A manager that answers these plainly is showing you its credit process. One that answers with the target return is showing you its marketing.
The Bottom Line
Yield is what you see. Underwriting is what you own. If a manager can’t explain how it decides who gets a loan, the return isn’t a reward for credit skill. It’s luck that hasn’t run out yet.
Important Information
This article is general information only. It does not take into account your objectives, financial situation or needs, and is not financial product advice. Rixon Capital Pty Ltd [Australian Financial Services Representative Number: 001298795 ] is the manager of the Rixon Income Fund and the Rixon Credit Opportunities Fund. The funds are available to wholesale clients only, as defined in the Corporations Act 2001 (Cth). Read the relevant Information Memorandum before making any investment decision. An investment in the funds is not a bank deposit, and capital is at risk. Past performance is not a reliable indicator of future performance
