The Rise of Private Credit: What Growing Businesses Need to Know

Private credit has moved from a relatively specialized corner of corporate finance into a major source of capital for businesses that need more flexibility than conventional bank lending can provide.

The term covers privately negotiated debt provided by non-bank lenders such as private credit funds, direct lenders and business development companies. Instead of issuing a public bond or relying solely on a commercial bank, a borrower negotiates directly with one lender or a small group of lenders.

The market has expanded rapidly. According to the Federal Reserve's May 2026 Financial Stability Report, private credit loans represented approximately $1.4 trillion, or around 10% of total U.S. nonfinancial corporate debt, based on the latest data available from the second half of 2025.

For growing businesses, however, the important question is not how large the asset class has become. It is what private credit can finance, what lenders expect in return and when it makes sense to use it.

What Is Private Credit?

Private credit generally refers to debt that is originated outside public bond markets and conventional syndicated lending channels.

Loans are usually negotiated directly between the borrower and the capital provider. They are commonly held by the originating lender rather than immediately distributed into a liquid secondary market.

The Federal Reserve describes private credit as non-publicly traded debt provided by non-bank entities to private businesses. Historically, the market concentrated heavily on middle-market companies, although private lenders have increasingly participated in larger transactions.

Private credit can include several strategies.

The European Central Bank similarly defines private credit primarily around directly originated, non-syndicated corporate lending by non-bank financial institutions.

Why Has Private Credit Grown So Quickly?

Part of the answer lies in the gap between what businesses need and what conventional banking systems are designed to provide.

Banks remain central to corporate finance, but bank credit committees operate within regulatory capital requirements, concentration limits, collateral rules, internal sector limits and standardized underwriting frameworks.

Some perfectly viable transactions simply do not fit those parameters.

Private lenders have built businesses around that gap.

The International Monetary Fund has identified speed, flexibility and borrower attention as important elements behind the growth of private credit. Its analysis also notes that the market historically developed to serve companies that could fall between conventional bank lending and public debt markets.

This is one reason private credit financing has become increasingly relevant to growing companies, acquisition buyers and sponsors looking for capital outside conventional lending channels.

Private Lenders Can Be More Flexible on Structure

Flexibility is one of the principal reasons borrowers consider private credit.

A traditional lender may have relatively strict parameters around leverage, amortization, collateral or industry exposure. A private credit fund can sometimes structure around the specific economics of the transaction.

That flexibility can relate to:

• higher leverage;
• custom amortization;
• bullet maturities;
• delayed-draw facilities;
• acquisition facilities;
• incremental debt capacity;
• revolving components;
• payment-in-kind interest;
• bespoke financial covenants;
• second-lien debt; and
• unitranche structures.

That does not mean every borrower will receive highly flexible terms. The structure ultimately reflects the lender's assessment of credit risk, collateral, cash-flow visibility and downside protection.

Private Credit Is Often Used for Acquisitions

Acquisition finance has become one of the most visible applications of private credit.

Buyers frequently require committed financing within a defined transaction timetable. A lender that can underwrite the acquisition directly and negotiate one set of financing documents may provide greater execution certainty than a financing process that depends on broad syndication.

Private credit can therefore be particularly relevant for leveraged buyouts, sponsor-backed acquisitions, management buyouts, corporate acquisitions and acquisition-plus-refinancing transactions.

The ECB notes that a significant share of private credit is connected to acquisitions undertaken by private equity firms, demonstrating how closely the expansion of private credit has become linked with private-equity-backed corporate finance.

It Is Not Only a Private Equity Product

Private credit is sometimes discussed as though it exists only for private equity sponsors.

That is increasingly inaccurate.

Independent operating businesses can also use private debt to finance expansion, refinancing, shareholder transactions, acquisitions and capital expenditure.

A family-owned manufacturing company, for example, might use private credit to acquire a competitor without issuing new equity. A distributor might refinance existing debt while adding acquisition capacity. A profitable business may seek a bespoke term facility because a bank is unwilling to provide the required leverage or tenor.

The relevant question is whether the borrower's cash flow and transaction economics can support the debt.

Borrowers Usually Pay for the Additional Flexibility

Private credit is not normally the cheapest form of corporate debt.

Private lenders are often financing businesses, structures or leverage levels that command a premium over conventional senior bank debt.

Total borrowing cost can include:

• a floating base rate;
• a contractual credit spread;
• original issue discount;
• upfront fees;
• commitment fees;
• unused-line fees;
• prepayment protection; and
• legal, diligence and documentation costs.

Some transactions may also include payment-in-kind interest, warrants or other economic participation.

The appropriate comparison is therefore not simply the stated interest margin.

Floating-Rate Debt Deserves Particular Attention

Much of the private credit market uses floating-rate loans.

This means a borrower's interest expense can change materially as the underlying benchmark rate changes.

A facility priced at a benchmark rate plus a contractual spread may initially appear manageable but become materially more expensive if benchmark rates increase.

Growing companies should therefore model debt service under several interest-rate scenarios rather than relying solely on the rate available at closing.

This issue has also attracted regulatory attention. The International Monetary Fund's analysis of private credit has highlighted the combination of higher leverage and floating-rate borrowing as an important source of potential borrower vulnerability.

Understand Payment-in-Kind Interest

Some private debt structures allow part of the interest obligation to be paid in kind rather than in cash.

Instead of paying that interest currently, the amount is added to the loan balance.

This can preserve cash during a growth period or transaction integration phase, but it does not eliminate the cost. The debt compounds.

For example, a business with a substantial PIK component may report lower immediate cash interest while its outstanding principal continues to increase.

PIK can therefore be useful when deliberately incorporated into a capital structure, but it should not be mistaken for free flexibility.

Covenants Still Matter

A private lender may offer greater structural flexibility than a bank while still requiring significant lender protections.

These can include leverage covenants, fixed-charge coverage tests, minimum liquidity requirements, limitations on additional debt, restrictions on acquisitions, restrictions on distributions and reporting requirements.

The borrower should understand both the covenant level and the amount of headroom in the financial model.

A covenant that can only be satisfied under management's base-case forecast may leave the business exposed to a technical default after relatively modest underperformance.

Security Packages Can Be Extensive

Private credit facilities are frequently senior secured.

Depending on the transaction, lenders may take security over shares, receivables, bank accounts, inventory, equipment, intellectual property, real estate or substantially all assets of the borrower and relevant subsidiaries.

They may also require guarantees from operating subsidiaries or holding companies.

Owners should therefore consider the implications of the security package before focusing exclusively on leverage or pricing.

Where several debt facilities exist, intercreditor arrangements become especially important. Senior lenders, asset-based lenders, mezzanine providers and other creditors need clearly defined rights over collateral and enforcement proceeds.

Private Credit Has Expanded Beyond Traditional Cash-Flow Lending

The market is also becoming broader.

Private capital is increasingly active in asset-backed finance, infrastructure, specialty finance and other financing strategies that historically sat more squarely within banks or specialist lenders.

That expansion matters because alternative capital no longer refers to one uniform lending product.

A business seeking $20 million of acquisition debt requires a different lender universe from a company seeking an inventory facility, receivables finance or equipment-backed financing.

Private credit should therefore be approached as a segmented institutional market rather than a generic collection of lenders.

Lender Selection Matters

The largest lender is not automatically the best lender for a particular borrower.

Funds differ significantly in:

• minimum and maximum transaction size;
• industry appetite;
• geographic coverage;
• acceptable leverage;
• collateral requirements;
• sponsor versus non-sponsor appetite;
• hold size;
• pricing targets;
• tenor;
• documentation preferences; and
• portfolio construction constraints.

A lender whose mandate does not match the transaction may reject an otherwise financeable opportunity simply because it falls outside its investment strategy.

This is why disciplined structured lender outreach matters. A financing requirement should be matched to counterparties whose actual mandate fits the facility size, geography, industry, collateral and risk profile.

What Private Credit Lenders Actually Underwrite

Despite the flexibility associated with private markets, private lenders still need a credible route to repayment.

For cash-flow lending, underwriting frequently focuses on EBITDA quality, free cash flow, leverage and debt-service capacity.

Lenders will also examine:

• historical financial performance;
• quality of earnings;
• customer concentration;
• recurring versus transactional revenue;
• working-capital requirements;
• management forecasts;
• existing indebtedness;
• capital expenditure;
• collateral;
• management experience;
• industry risk;
• ownership structure;
• acquisition economics, where relevant; and
• downside recovery value.

A lender will normally stress management's forecast rather than simply accepting it.

If a facility is only serviceable when every growth assumption is achieved, the proposed debt structure is likely too aggressive.

Private Credit Can Improve Execution Certainty

One advantage of a bilateral or club-style private credit transaction is that the financing can often be negotiated with the institutions that expect to hold the debt.

This differs from structures where the initial lender expects to distribute a large portion of the facility to the broader market.

For acquisitions and time-sensitive transactions, this can reduce syndication risk and provide greater certainty over the amount of capital available at closing.

Certainty, however, has a price. A borrower should assess whether the faster or more flexible execution justifies the all-in economics.

Private Credit Is Not Automatically the Right Answer

The growth of the market does not mean every business should use it.

A conventional bank facility may be preferable where the borrower can obtain sufficient capital on acceptable terms at a materially lower cost.

Equity may be more appropriate where the business cannot reasonably support fixed debt obligations.

Asset-based lending may be a better fit when the financing requirement is primarily driven by receivables and inventory rather than enterprise cash flow.

Trade finance may provide a more efficient structure for self-liquidating import and export transactions.

The correct financing source should follow the economics of the requirement.

Borrowers Should Evaluate the Entire Capital Structure

Private debt does not exist in isolation.

A growing company may have a revolving bank facility, equipment leases, senior private debt and shareholder capital at the same time.

An acquisition may require senior debt, a revolving facility, seller financing and equity.

The interaction between those instruments determines the company's real leverage and liquidity position.

This is where structured debt advisory becomes relevant: the objective is not simply to obtain an indication from a lender, but to determine what debt structure the business can support and which part of the credit market is likely to finance it.

Run the Financing Process Before Capital Becomes Urgent

Private credit can execute quickly, but complex financing still requires preparation.

A lender will need financial statements, management accounts, forecasts, a debt schedule, ownership information and a clear description of the use of proceeds.

An acquisition financing process may also require target financials, transaction documents, quality-of-earnings work, sources and uses, pro forma leverage and integration assumptions.

Waiting until liquidity is nearly exhausted weakens the borrower's position.

Businesses generally have greater negotiating leverage when they can compare several credible financing alternatives rather than needing one lender to close immediately.

Alternative Capital Is Becoming Part of Mainstream Corporate Finance

Private credit should no longer be viewed simply as an emergency alternative for companies that cannot obtain a bank loan.

It has developed into a substantial institutional market capable of financing acquisitions, refinancings, recapitalizations, growth investments and increasingly specialized asset-backed transactions.

At the same time, the flexibility of private debt does not remove the fundamental rules of leverage.

Debt still needs to be serviced. Covenants still need to be observed. Maturities still need to be refinanced or repaid. Higher leverage still increases downside risk.

The opportunity for growing businesses is therefore not simply access to more capital.

Used correctly, private credit can provide execution certainty and flexibility that conventional financing may not offer. Used without sufficient attention to pricing, leverage, covenants and refinancing risk, that same flexibility can become expensive.

The question is not whether private credit is better than bank lending. It is whether a particular private credit structure is the right capital for the particular transaction.