Private credit means loans made by non-bank lenders, typically investment funds, directly to companies. The market has grown quickly because many middle-market businesses want more flexibility or speed than a traditional bank provides, and many investors want the income that these loans can offer.
How it differs from a bank loan
A bank lends against its own deposits and is bound by regulation and internal credit policies that can limit what it will finance. A private credit fund lends money raised from investors and can often tailor the structure: the size, the repayment schedule, the covenants and the use of proceeds. A small group of lenders may hold the whole loan, which can mean faster decisions and a more direct relationship.
Senior and mezzanine
Senior debt is repaid first and is usually secured by company assets, so it carries a lower interest rate. Mezzanine debt sits behind senior debt in priority, so lenders ask for a higher return, sometimes with an equity component. A company might use senior debt for most of its financing and add a mezzanine layer to reach a higher total than a bank would allow.
Typical uses
Companies use private credit to fund acquisitions, buy out a partner, refinance existing debt, finance growth or return capital to owners. It can also help when a company's situation does not fit a bank's standard model, for example when earnings are lumpy or the business is asset-heavy.
What it costs
Private credit usually costs more than a bank loan. Rates are often floating, and there may be fees at closing, prepayment terms and financial covenants that the company must meet. In return, the borrower gets flexibility and certainty of execution. The right question is not which loan is cheapest, but which structure fits the plan and leaves enough room if results fall short.
Before you borrow
Model the loan against a downside case, not only the plan. Read the covenants closely. Understand what happens if you breach one. Talk to more than one lender and use an adviser who knows the market to compare the terms. Debt can be a powerful tool for an owner, but it has to be sized to the business, not to the lender's appetite.
This article is general information, not legal, tax, investment or insurance advice. Speak with your own advisers about your situation.
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