The Rise of Private Credit and What It Means for Small and Mid-Sized Businesses

Traditional banks are pulling back from riskier segments, tightening lending standards, and facing heightened regulatory scrutiny. Non-bank lenders like private credit funds, business development companies and direct lenders are moving into the gap, offering flexible capital to small and mid-sized businesses. For owners, this shift brings opportunities and trade-offs. Understanding how private credit works, when it makes sense, and what pitfalls to avoid will help leaders make better financing decisions in this evolving credit landscape.

What Is Private Credit and Why Is It Growing

Private credit refers to non-publicly traded debt financing provided by non-bank entities. These might include private credit funds, direct lenders, business development companies, or other alternative lenders. The target borrowers often are small or mid-sized firms with annual revenues ranging from about US$10 million to US$1 billion, though that boundary is shifting as the market expands. Torys+3Federal Reserve+3Latham & Watkins+3

Several factors drive private credit’s rise:

• Bank pullback: Stricter regulations, risk aversion, and balance sheet constraints are reducing banks’ willingness to lend to smaller firms or under riskier terms. Private credit fills that financing void. Torys+2Federal Reserve+2

• Demand for flexibility: Private lenders often offer more customized deal structures such as covenant flexibility, longer-tenor financing, or hybrid debt instruments. That appeals to businesses that don’t fit neatly into traditional loan templates. Wellington+2Akin - Akin, an Elite Global Law Firm+2

• Higher return premiums for investors: Investors (including institutional players, pension funds, insurance companies) are drawn by yields above those available in public credit or traditional bonds, especially in a high interest rate environment. Illiquidity, complexity, and customization come at a price. BlackRock+2Dechert+2

As of 2024, the private credit market had grown to roughly US$1.5-2.0 trillion in assets under management globally, up sharply from several years prior. Projections suggest continued growth and broader adoption across geographies and industry sectors. 

Opportunities for Small and Mid-Sized Businesses

For businesses in need of capital, private credit offers several potential advantages:

1. Access where traditional banks refuse or delay

   For businesses that are too small, too risky, or need speed, non-bank lenders often step in faster. They may take on risk profiles banks avoid, particularly when owners can offer strong cash flow forecasts, collateral, or niche industry exposure that traditional underwriting doesn’t fully appreciate.

   
   

2. Custom financing terms

   Private lenders may allow more flexible repayment schedules, interest-only periods, or creative covenant structures. That flexibility can align debt service with revenue cycles, seasonal fluctuations, or growth plans, helping manage cash flow stress.

   
   

3. Bridging capital shortages

   When banks pull back due to rate hikes or regulatory changes, private credit fills the financing gap for working capital, expansion, M&A, or even refinancing more expensive debt. Small firms can use private credit to accelerate growth or stabilize operations.

   
   

4. Leveraging investor interest in alternatives

   Because many private credit funders are flush with capital (from institutional investors, insurance companies, pension funds), they are looking for deployable opportunities. That competition among lenders can sometimes improve borrowing terms, though not always dramatically. Dechert+2Wellington+2

Risks, Trade-Offs, and What Business Owners Must Consider

Opportunities come with risks. Small and mid-sized businesses should consider these trade-offs carefully.

• Cost of capital tends to be higher than traditional bank loans. Private credit often compensates for higher risk, illiquidity, or more complex underwriting by charging higher interest rates, fees, or stricter covenants.

• Less regulatory protection and potentially less transparent underwriting. Non-bank lenders may not be subject to the same oversight as banks. That means you’ll want to review contract terms closely, particularly around covenants, default triggers, and refinancing obligations.

• Refinancing risk or rollover risk. If a private credit loan is intended as short-term or has balloon payments, you may face challenges when renewing or replacing that debt, especially if credit conditions tighten or economic downturn hits. Brookings+1

• Covenants and restrictive terms. To compensate for risk, private credit funds often use tighter financial covenants (like interest coverage, leverage ratios) or restrictive clauses (e.g., limitations on capital expenditures, distributions, or further borrowing). Violations can lead to default even if business operations are otherwise sound.

• Dependence on lender’s business health. If your lender faces liquidity issues, regulatory pressure, or market retraction, that may affect your financing. Also, sometimes private credit funds work with multiple tranches or layers of financing which adds complexity to legal structure and risk.

How to Evaluate If Private Credit Is Right for Your Business

To decide whether private credit fits, ask these questions and do this analysis:

• What length of financing do I need? Short-term, medium, or long term? Do I expect revenue growth or cash flow trends to improve soon?

• How strong is my cash flow now (and forecasted)? Can I withstand higher interest or more aggressive covenant thresholds?

• What are all the costs involved? Look beyond interest rate to origination fees, upfront costs, legal fees, prepayment penalties, ongoing covenants, and default costs.

• How restrictive are the covenants? What events of default might be triggered? What flexibility do I have for things like capital expenditures or paying down prior debt?

• What collateral or guarantees will I need to offer? Sometimes non-bank lenders require more-heavy collateral when credit risk is seen as higher.

• What fallback options are there? If revenue dips, or if the lender demands stricter terms, can I pivot to alternative financing (e.g. smaller credit lines, invoice financing, or equity)?

• How does this financing affect my financial ratios and credit profile? Will taking on private debt affect future ability to borrow from banks or public markets?

What the Bigger Picture Means for the Market

• Banks partnering or competing with private credit: Many banks are now collaborating with private credit funds or distributing private credit-style products. They may sell off non-core loan portfolios; alternatively, banks may originate and then pass along risk to private credit entities. Federal Reserve Bank of Kansas City+2Dechert+2

• Regulatory attention is increasing: As the private credit market grows, so does regulatory interest in disclosures, transparency, risk-management, and systemic risk. Small businesses should expect tighter oversight, especially for large deals or funds that touch public entities. Dechert+2Federal Reserve+2

• Interest rate environment matters: In a high or “higher-for-longer” interest rate regime, private credit lenders may be more cautious about underwriting risk. They’ll focus on interest coverage ratios, cash flow stability, and avoid overly aggressive leverage. Businesses with strong cash flows will have an advantage. Wellington+1

• Diverse asset classes and deal structures: Private credit is branching beyond direct lending into asset-backed finance, infrastructure, real estate, growth lending, and more bespoke deal structures. That means opportunities to find financing that more closely matches your needs. Wellington+2Dechert+2

Action Steps for Business Owners Considering Private Credit

1. Prepare a detailed cash flow forecast under multiple scenarios (base, worse case, best case). Highlight how much breathing room exists if costs rise.

   
   

2. Benchmark offers: compare bank financing, SBA loans, and private credit in terms of all costs (interest, fees, prepayment, etc.), not just headline rate.

   
   

3. Engage legal/financial counsel familiar with private credit deals—especially covenants, collateral, and default risk.

   
   

4. Maintain strong financial documentation: audited statements, projections, proofs of receivables or contracts. Lenders often require detailed information.

   
   

5. Monitor your existing debt exposure: understand what is fixed vs variable, and how private credit obligations interact with other obligations.

Private credit is growing rapidly. For many small and mid-sized businesses, it fills financing gaps left by traditional banks. However, flexibility and access come with higher costs and more complex agreements. Business owners who understand terms, forecast carefully, and compare all options position themselves to benefit from private credit without being exposed to avoidable risks.