Private Credit: What Small Business Owners Need to Know About the Shift in Corporate Lending

As the financial landscape evolves, a new trend in borrowing is gaining traction—and it could affect how your small business gets funding. Known as private credit, this financing model is reshaping the way companies, both large and small, approach loans.

While large corporations or private equity firms have traditionally used private credit, it's now entering the mainstream, and savvy small business owners should understand what it is, how it works, and whether it's a smart option for their growth plans.

What Is Private Credit?

Private credit refers to loans provided by nonbank lenders such as investment funds, asset managers, or insurance companies rather than traditional banks. These loans are negotiated directly between the borrower and lender, allowing more customized terms, quicker execution, and, in many cases, access to higher amounts of capital.

In recent years, private credit has seen explosive growth. In 2023, the market had $1.7 trillion in assets under management globally, and it's projected to more than double to $3.5 trillion by 2028. For comparison, that would make it larger than the current U.S. leveraged loan and high-yield bond markets combined.

Apollo, Ares, and Blackstone are targeting the space with their own offerings. Some examples are  Citi-Apollo Private Credit Partnership, a $25 billion alliance with Citigroup, and Atlas SP.

Why Is This Happening Now?

A few factors are fueling this surge:

• Regulatory Pressure on Banks: Since the 2008 financial crisis, banks have been required to reduce their risk exposure. This made them less willing to lend to businesses that don’t meet strict criteria.

• High Interest Rates: Traditional financing has become more expensive. Many borrowers are seeking alternative lending sources that offer more flexible structures, even at similar or higher rates.

• Banking Sector Volatility: Events like the collapse of regional banks in early 2023 have shaken confidence and opened doors for private lenders to step in where banks might have previously dominated.

What’s in It for Small Business Owners?

While private credit may seem like something only large corporations use, the benefits are becoming accessible to mid-sized and even some smaller firms.

Pros:

1. Customized Terms: Unlike banks, private lenders can tailor repayment schedules, covenants, and interest structures.

2. Faster Decisions: Without the red tape of traditional underwriting, deals can close more quickly.

3. Access to Capital: You may be able to borrow more than what a traditional bank would approve.

4. Flexible Use of Funds: Private credit loans can often be used for a wide range of business needs—growth, acquisition, restructuring, or refinancing expensive debt.

Cons:

1. Higher Interest Rates or Risky Terms: Some private credit deals come with floating rates, payment-in-kind interest (where payments are deferred), or subordinated positions in the capital structure. These can be more costly or risky in the long run.

2. Limited Legal Protections: Bank loans often come with regulated dispute resolution and protections for borrowers. Private agreements may not offer the same safety net.

3. Less Oversight: While flexibility can be an advantage, it also means less transparency in pricing and performance compared to bank loans.

Should You Consider Private Credit?

The answer depends on your specific situation. Here are some guidelines:

Consider borrowing now if:

• You’re refinancing expensive or maturing debt.

• You’ve been turned down by traditional banks due to stricter lending standards.

• You’re eyeing fast-paced growth or acquisitions and need quick access to capital.

• You have strong fundamentals but need a more customized deal structure.

Consider waiting if:

• Your business is not yet profitable or carries a high debt load.

• You don’t fully understand the complexities of private lending terms.

• Interest rates are predicted to drop and you can hold out for cheaper capital from traditional sources.

• You haven’t explored Small Business Administration (SBA) or community bank loans, which may still offer attractive terms.

The Bottom Line

Private credit is no longer just for Wall Street. It’s a rapidly growing financing option that can offer valuable flexibility and speed for the right business.

If you're thinking about exploring private credit, here’s how to start:

1. Work with an advisor or fractional CFO who understands credit structuring and can vet the terms.

2. Do your due diligence on the lender. Not all private credit funds are created equal. Look for reputable firms with experience in your industry.

3. Know your leverage limits. Avoid overextending your business just because capital is available.

4. Compare offers side-by-side with traditional loans. Even a higher-interest private loan might be a better fit if it offers faster execution or better repayment flexibility.

With opportunity comes risk. Small business owners should proceed with caution, clarity, and expert guidance. If you're planning to expand, refinance, or restructure, now is the time to educate yourself on all your lending options—not just those offered by banks.