Recently I read an article and investment report on two finance companies that pay sizable current distributions and interest, all of which are supported by accrued revenue. Accrued revenue or accrued interest is not paid until an investment or loan matures. For example, if a company makes a two-year, $1,000,000 preferred equity investment with a 12% accrued interest, in two years the company will receive back the $1,000,000 in principal and $240,000 of interest. There is a lag before a company realizes accrued revenue.
If a company is paying a current distribution that is backed by accrued revenue, cash has to come from somewhere until the accrued revenue is realized. This typically is either through borrowing or equity. Eventually, as a finance company grows and matures, its flow of realized accrued investments should exceed the amount it pays in distributions.
This is not yet the full situation in the two finance companies where 100% of their investments are accrued, and their current distributions are being paid through reserves, equity, borrowings, and in one company, some operating cash flow (realized accrued income). Neither the article nor the investment report noted the accrued income, the time differential between when revenue is booked and when cash is realized, or addressed how the companies were paying current distributions. This annoys me and it is sloppy work. I believe the authors did not fully understood the companies they were writing about, which is bad.
There is nothing wrong whatsoever with finance companies that originate or own accrued investments. If a finance company makes accrued investments with equity or borrowings that require current distributions or interest payments, how the company supports those current distributions or interest payments is important information. Unfortunately, you would not get this information from the two pieces I read.