How does BDC make money?

BDCs, or Business Development Companies, are specialized financial institutions that focus on investing in the debt and equity of smaller to medium-sized enterprises, primarily in the United States. These companies play a crucial role in providing funding to businesses that may not have access to traditional financing options.

One of the key investment strategies employed by BDCs is investing in the debt of these smaller companies. This can include various types of debt instruments, each with its own level of risk and reward.

One example of debt investments made by BDCs is senior secured debt. This type of debt is typically considered lower risk as it is backed by collateral and has a higher priority in the case of bankruptcy or liquidation.

Another type of debt investment made by BDCs is subordinated debt. This debt ranks below senior debt in terms of priority, making it more risky but also potentially offering higher returns.

Unsecured debt is another option for BDCs looking to invest in the debt of smaller companies. As the name suggests, this type of debt is not backed by collateral, making it the riskiest but potentially most rewarding investment option.