Move when the bank cannot give the business what it needs: more leverage than bank policy allows, room after a covenant breach or a weak year, capital for acquisitions, or a structure the bank will not write. Private credit funds price above banks, usually take an upfront fee and a premium for early repayment, and amortize less. In return they set covenants from the business's own forecast and lend further against earnings. Run the refinance as a competitive process and compare term sheets on all-in cost, covenant headroom and flexibility, not the headline rate.
- What changes
- Price goes up; leverage, flexibility and structure go up with it
- Bank reach
- Senior cash-flow lending commonly at 2x to 3.5x EBITDA
- Private credit reach
- Unitranche lenders stretch further
- Watch for
- Upfront fees, call protection, default pricing, reporting load
- Lenders in the book
- 1,148 write term & private credit
When the bank stops fitting
Banks lend deposits, under regulators who examine their loans. That makes bank money the cheapest debt most private businesses can get, and it is why bank credit policy is narrow: modest leverage, steady amortization, financial covenants tested every quarter, and little appetite for a borrower whose numbers have moved the wrong way. The relationship works until the business needs something outside the policy.
- A covenant breach or a weak year. A bank that has moved a loan to its special assets group is usually looking for an exit, not a longer relationship. See what to do when you breach a covenant.
- Growth the policy cannot follow. An acquisition, a large contract or a new facility that needs more debt than the bank's leverage limits allow. See add-on acquisition financing.
- A structure the bank will not write. Interest-only periods, a delayed-draw facility for future acquisitions, lending against earnings rather than hard collateral, or one loan in place of a senior and subordinated stack.
- A maturity the bank will not renew. See refinancing ahead of a balloon maturity.
- An owner taking liquidity. A recapitalization usually needs more leverage than a bank will provide.
None of this means the bank is wrong. A bank declining to stretch is doing what it is built to do. The question is whether a different kind of lender, at a higher price, gets the business somewhere worth going.
What private credit does differently
Private credit lenders are funds and non-bank lenders that lend investors' capital rather than deposits. In the lower middle market they range from small funds that hold every loan they make to larger direct lenders offering unitranche. They share a few habits.
| Bank | Private credit | |
|---|---|---|
| Source of money | Deposits; regulated and examined | Investor capital; no deposits |
| Price | The lowest cost of debt most businesses can get | Higher: usually a floating spread over a base rate, plus upfront fees |
| Leverage | Senior cash-flow lending commonly 2x to 3.5x EBITDA | Further, especially in a unitranche loan |
| Amortization | Steady, often over the life of the loan | Lighter, with more of the principal due at maturity |
| Covenants | Standard coverage and leverage tests, set by policy | Negotiated from the business's forecast, with more headroom |
| Early repayment | Often little or no premium | Call protection is common in the early years |
| Deposit accounts | Operating accounts usually required at the bank | No requirement to move operating accounts, though the lender usually takes control agreements over them |
| Decisions | Credit policy, committees, regulatory review | A small investment committee with more discretion |
| After a problem | Often moves the loan to special assets | More willing to amend and stay, at a price |
Two differences matter more than the rest. The first is leverage. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA; unitranche lenders stretch further, blending senior and subordinated risk into one loan at one blended price. See senior vs unitranche. The second is covenants. A private credit lender builds its tests from the business's own forecast, with room below it, rather than from a policy grid. The loan still has covenants, as lower-middle-market private credit nearly always does, but they are more likely to fit the business.
The price of that fit is real. Beyond a higher rate, expect an upfront fee netted from proceeds, a premium for repaying in the early years, a default rate if things go wrong, and monthly reporting. At the edge of a fund's range, expect more: tighter controls on distributions, board observation rights, sometimes warrants, which is where private credit starts to look like mezzanine.
How private credit underwrites a refinance
A fund lending further against earnings reads the business more closely than a bank does, not less, because less amortization means less of the risk is paid down along the way.
- Quality of earnings. Adjusted EBITDA with every add-back documented. A lender lending more turns of earnings is stricter about what the earnings are. See EBITDA add-backs.
- Why the bank is leaving, or being left. The plain story of the breach or the bad year, what caused it and what has changed. The fund will read the bank correspondence in diligence anyway.
- The forecast and its downside. Covenants are set off the forecast, so the fund wants to see the case in which things go wrong and how much room remains in it.
- Fixed-charge coverage. Cash flow after capital spending, taxes and distributions against fixed charges, because lighter amortization is only safe if cash is really left over. See FCCR.
- Enterprise value. A cash-flow lender is ultimately lending against what the business would be worth to a buyer, so customer concentration, owner dependence and recurring revenue weigh as much as the collateral.
Transparent's conventional term-loan checklist is the core of the file: P&L, year-to-date P&L through last month-end, balance sheet, debt schedule, and AP aging. A fund will ask for more, and a file that arrives with a financing model, a lender presentation and a written underwriting memo has answered most of it before the questions are sent.
Running the refinancing process
A refinance run through one lender is a negotiation with no alternative. Run through several, it is a market. The sequence:
- Build the package before calling anyone. Financing model, lender presentation, blind teaser and underwriting memo. Transparent builds that package in a day once the documents are in; by hand, the same package takes at least a week. See the package.
- Choose lenders by fit. Of the 1,800+ lenders in Transparent's book, 1,148 write term and private credit. The right ones for a file are those whose hold size, industry and leverage appetite match it, not the longest list. See the lender book.
- Send the teaser first, then the full package under confidentiality. Each interested lender gets the same information at the same time, so term sheets can be compared on equal terms.
- Compare term sheets on the whole deal. Rate and upfront fees combined into an all-in cost over the time you expect to hold the loan; call protection; amortization; each covenant level against the forecast; equity cure rights; permitted acquisitions and distributions; reporting; guarantees.
- Keep the bank informed. Until the payoff wires, the bank is still your lender. A refinance that surprises it, especially while it is waiving a breach, makes the last stretch harder.
Compare term sheets on all-in cost and covenant headroom, not the headline rate. The cheapest loan with covenants the business will breach in a bad quarter is the most expensive loan on the table.
When not to move
Private credit is the right answer to a structural problem and an expensive answer to a temporary one. If the business had one weak year with a clear cause, an amendment from the bank, a move to another bank, or an SBA loan may cost far less. If the business needs working capital rather than leverage, an asset-based line lends against receivables and inventory, typically at 80% to 90% of eligible receivables, usually for less than a cash-flow fund charges; 235 lenders in the book write asset-based lines. And if the goal is more leverage to fund a distribution, test whether the business services it in a bad year, not only in its best one.
Many owners use private credit as a bridge: a few years at the higher price to get through an acquisition or a recovery, then a refinance back to a bank once the numbers fit a bank's policy again. That path works when the call protection has run off by then and the loan's covenants have left room to get there. Model the return trip before signing the first one.
Common questions
- Is private credit more expensive than a bank loan?
- Yes, in rate and in fees. The comparison that matters is the cost of the private loan against the cost of not having it: the acquisition that does not happen, the breach that does not get cured, or the bank exit that happens on the bank's timetable.
- Do private credit lenders require personal guarantees?
- It depends on the size and strength of the business. Larger, well-established borrowers often avoid a full personal guarantee; smaller businesses may still be asked for one, or for a limited guarantee.
- Will private credit refinance a loan that is in default with my bank?
- Some funds will, if the business is sound and the default has a clear cause that is behind it. They will want the bank correspondence, the waiver or forbearance terms and a forecast they can believe, and they will price the risk.
- Can I move back to a bank later?
- Yes, if the business grows back into bank policy. Check the call protection and prepayment terms in the private loan before signing, so that moving back is not penalized when the time comes.
- What does all-in cost mean on a term sheet?
- The rate plus every fee spread over the period you expect to keep the loan. An upfront fee costs more per year on a loan repaid early than on one held to maturity, so the same term sheet can be cheap or expensive depending on your plans.