A private credit loan costs a floating base rate, usually SOFR with a floor under it, plus a spread, plus an upfront discount or closing fee, plus ongoing fees such as unused and agency fees, plus a prepayment premium if you repay early. It costs more than a bank loan on almost every line. What it buys is more debt, lighter amortization and fewer personal guarantees. To compare offers, turn every fee into an annual cost over the period you actually expect to keep the loan, and divide by the cash you actually receive.
- Base rate
- SOFR in most private credit loans, with a floor beneath it
- Spread
- Set by leverage, size, sector and whether a sponsor stands behind the deal
- Upfront cost
- Original issue discount or a closing fee, deducted from what you receive
- Ongoing fees
- Unused fees on undrawn commitments, an annual agency fee
- Exit cost
- Call protection: a premium for repaying in the early years
- How to compare
- Effective annual cost over your expected hold, per unit of cash received
The layers of the price
A private credit fund quotes its price in pieces, and each piece is paid at a different time. The interest rate is paid monthly or quarterly for as long as the loan is outstanding. The discount or closing fee is paid once, on day one, usually by holding it back from the money wired to you. Unused and agency fees are paid for as long as the facility exists. A prepayment premium is paid only if you leave early. Because the timing differs, two offers with the same headline rate can cost very different amounts, and an offer with a higher rate can cost less.
| Layer | What it is | When you pay it | How to count it |
|---|---|---|---|
| Base rate | Term SOFR, reset monthly or quarterly; some loans use Prime | Every interest period | Use today's base rate or the floor, whichever is higher |
| Floor | The lowest base rate the loan will ever charge, however far SOFR falls | Only when SOFR is below it | Treat the floor as the base rate whenever SOFR sits under it |
| Spread | The lender's margin over the base rate; may step down with leverage | Every interest period | Add to the base rate for the cash interest cost |
| Original issue discount (OID) | The loan is funded below its face amount; you repay the full face | Day one, out of proceeds | Spread it over the years you expect to keep the loan |
| Closing or arrangement fee | A fee for committing and arranging the loan | Day one, out of proceeds | Same as OID: it is the same economics under another name |
| Unused fee | A charge on committed but undrawn amounts, such as a delayed-draw tranche or a revolver | Quarterly, on the undrawn balance | Add the expected annual amount |
| Agency fee | A flat annual fee to the agent that administers the loan | Annually | Add the annual amount |
| Call protection | A premium for repaying in the early years, falling over time | Only if you repay early | Add it if your plan involves repaying or refinancing in that window |
| Lender's legal and diligence costs | The borrower usually pays the lender's counsel and its outside diligence, such as field exams and appraisals | At closing | Add to the upfront cost |
Base rate and floor: the part you do not negotiate much
Almost every private credit loan floats. The base rate is usually term SOFR, the secured overnight financing rate published for one- and three-month periods, and it resets at each interest period. Some banks and a few funds use Prime instead; SOFR vs Prime-based loans explains how the two behave. You cannot negotiate SOFR itself. You can negotiate the floor, the minimum base rate the loan will charge. A floor protects the lender if rates fall. When SOFR is above the floor, the floor costs nothing; when SOFR falls below it, you keep paying as if it had not.
Floating rates also bring a second cost that rarely appears in the pricing section of a term sheet: many lenders require the borrower to hedge part of the loan with a swap or a rate cap. The cost of that hedge is part of what the loan costs you. See whether lenders require an interest rate hedge and swap vs cap.
What sets the spread
The spread is the lender's price for the risk it is taking, and it moves with the same things that move the amount a lender will lend. Higher leverage, smaller EBITDA, a cyclical or concentrated customer base, and a business that depends on its owner all push the spread up. A private equity sponsor behind the deal usually pulls it down, because the sponsor has equity at risk beneath the loan and a record of supporting its companies. A unitranche loan carries a higher spread than a senior loan because it also covers the riskier layer that would otherwise be second-lien or mezzanine debt.
Many private credit agreements include a pricing grid: the spread steps down as leverage falls. A grid rewards the company for paying down debt or growing earnings, and it is worth negotiating because it turns good performance into a lower rate without a refinancing. Some loans also allow part of the interest to be paid in kind, added to the balance instead of paid in cash, at a higher total rate. PIK interest saves cash now and costs more later.
A spread quoted without the floor, the discount and the call protection is not a price. It is one line of a price.
Original issue discount and upfront fees
Original issue discount means the lender funds less than the face amount of the loan while you owe the full face. On a loan with a face of 10,000 and a discount of 200, you receive 9,800 and repay 10,000, and you pay interest on 10,000 from day one. An upfront closing fee of the same size, deducted from proceeds, has the same effect on your cash.
The discount is a one-time cost, so its annual weight depends entirely on how long the loan stays outstanding. Kept to maturity, it is spread over many years and adds little per year. Refinanced after a short hold, the same discount is spread over far fewer years and adds much more. That makes the expected hold period the most important assumption in comparing term sheets.
Private credit against bank pricing
A bank loan to the same company is almost always cheaper on paper: a lower spread, a small or no upfront fee, often no call protection. But the two are rarely offering the same loan. Banks commonly look for debt service coverage of at least 1.25x and usually require meaningful amortization and personal guarantees from owners. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA; unitranche lenders, most of them private credit funds, stretch further. Private credit is what you pay for when the bank's loan is too small, too tightly amortized or tied to guarantees you will not give.
| Term | Bank loan | Private credit loan |
|---|---|---|
| Spread over base rate | Lower | Higher, and higher again for unitranche |
| Floor | Sometimes | Usually |
| Upfront discount or fee | Small or none | Common |
| Call protection | Often little or none | Common in the early years |
| Amount of debt | Commonly within 2x to 3.5x EBITDA for senior cash-flow loans | Senior or unitranche; unitranche goes further |
| Amortization | Meaningful from the start | Often lighter, with more due at maturity |
| Personal guarantee | Usual for owner-operated companies | Often none, or a limited carve-out guarantee |
| Covenants | Coverage and leverage tests | Usually a leverage test and a coverage test, set against the lender's model |
The fair comparison is therefore not bank rate against fund rate. It is the fund's loan against the bank's loan plus whatever fills the gap the bank leaves: a mezzanine layer, a larger seller note, or more equity. What a layered capital stack actually costs works through that comparison, and moving from a bank loan to private credit covers the switch for an existing borrower.
How to compare two term sheets on one basis
Turn every cost into an annual amount over the period you expect to keep the loan, and divide by the cash you actually receive. It is an approximation that ignores the time value of money and amortization, but it puts offers on the same footing and catches the low rate that is paid for elsewhere. The example below uses illustrative round numbers, not market quotes.
- Offer A: face of 10,000; original issue discount of 200, so you receive 9,800; interest of 1,000 a year; an agency fee, 25 a year; a prepayment premium of 100 if repaid within the first three years, nothing after that.
- Offer B: face of 10,000; a closing fee, 100, so you receive 9,900; interest of 1,075 a year; no agency fee; no prepayment premium.
| Offer A, repaid after 3 years | Offer B, repaid after 3 years | Offer A, held 5 years | Offer B, held 5 years | |
|---|---|---|---|---|
| Interest paid | 3,000 | 3,225 | 5,000 | 5,375 |
| Discount or closing fee | 200 | 100 | 200 | 100 |
| Agency fees | 75 | 0 | 125 | 0 |
| Prepayment premium | 100 | 0 | 0 | 0 |
| Total cost | 3,375 | 3,325 | 5,325 | 5,475 |
| Cost per year | 1,125 | about 1,108 | 1,065 | 1,095 |
| Cost per year for every 100 received | about 11.5 | about 11.2 | about 10.9 | about 11.1 |
Offer A has the lower rate and is the cheaper loan if you keep it to maturity. If you expect to sell the company, refinance into a bank loan, or pay the loan down from an acquisition within three years, Offer B is cheaper, because A's discount and prepayment premium are spread over too few years. Neither answer is visible from the rate alone. Interest rate vs all-in cost covers the same method for other loan types, and prepayment penalties and call protection covers how premiums are structured.
What moves the price, and what does not
The largest lever on price is the file. A lender prices what it cannot verify as risk. Clean monthly financials, a defensible add-back schedule, a model that ties to the tax returns, and an honest account of concentration and seasonality narrow the gap between what the company is and what the lender fears it might be. The second lever is competition: a spread quoted by one fund is a starting position; the same credit shown to several funds that write this kind of loan produces a range, and the range is information.
- Worth negotiating: the floor, the size and length of call protection, a pricing grid, the unused fee on a delayed-draw tranche, the cap on lender expenses, and the definition of EBITDA that drives the grid.
- Rarely worth fighting: a few points of spread at the cost of a tighter covenant or a shorter maturity. The covenant decides whether the loan stays out of default; see covenant headroom.
Transparent's lender book holds 1,800+ lenders, and 1,148 of them write term and private credit. Once a borrower's documents are in, Transparent builds the full lender package, financing model, lender presentation, blind teaser and underwriting memo, in a day, so the credit reaches several funds on the same facts and their term sheets can be laid side by side on the same basis. Transparent charges nothing before a loan closes.
Common questions
- Is private credit always more expensive than a bank loan?
- On rate and fees, almost always. On the whole capital structure, not necessarily: if the bank will lend less, the gap has to be filled with mezzanine debt, a seller note or equity, and that combination can cost more than one private credit loan.
- What is a SOFR floor?
- The lowest base rate the loan will charge. If SOFR falls below the floor, you pay interest as if SOFR were at the floor. When SOFR is above it, the floor has no effect.
- Why does the expected hold period matter so much?
- Because the discount, the closing fee and any prepayment premium are fixed amounts. Spread over five years they add little per year; spread over two, they can outweigh a difference in spread between two offers.
- Do private credit loans require a personal guarantee?
- Often not a full one. Many private credit funds ask instead for a limited guarantee against fraud and similar bad acts. See whether you can avoid a personal guarantee.
- Can the spread come down after closing?
- Yes, if the agreement has a pricing grid that lowers the spread as leverage falls. Without one, the spread changes only through an amendment or a refinancing.