As commercial banks back away from making corporate loans, a new breed of lender is stepping in: Hedge funds are providing hundreds of millions of dollars to companies whose shaky credit disqualifies them for prime bank loans or whose needs are too puny to attract big commercial bankers. But with the new source of capital come new dangers, including the possibility that hedge funds will make risky loans and exploit information gained as lenders to benefit their trading gambits.
The uncertainties haven't stopped companies from lining up at hedge fund loan windows. SLS International Inc., a small Ozark (Mo.) maker of audio speakers for musicians and movie theaters, struck a distribution deal in March with Wal-Mart Stores Inc. But to take advantage of this opportunity to break into the consumer market, SLS needed cash to build a new factory in the U.S. and pay for supplies and production overseas. Big banks "wouldn't have provided the amount of capital that we needed," says SLS President Steven Lamar. "There's only so much risk they'd take."
