Private credit and mezzanine debt
Loans from lenders that are not banks, such as private credit funds, business development companies and SBA-licensed SBICs, to established mid-sized companies, often for growth, acquisitions or buyouts. Faster and more flexible than a bank, but at a higher price, and sometimes with a share of the company attached.
- Blanket lien (a UCC-1 filing over all business assets)
- Secured on assets
How it works
The Federal Reserve describes private credit as loans that are not traded publicly, made by lenders that are not banks, such as private credit funds and business development companies (BDCs), to private businesses. It is typically for middle-market companies, with yearly sales of about $10 million to $1 billion, though it has grown to fund larger ones. The lender and the company negotiate the terms between them, often with one lender or a small group ("direct lending").
What the loans look like:
- Senior or junior: direct lending funds usually lend senior secured loans, with first claim on the company's assets. Mezzanine and other junior loans rank behind the bank or senior lender, so they cost more.
- Floating rate: almost all private credit loans have a rate set above a benchmark rate, so payments rise when rates rise. The Federal Reserve found that rates over the benchmark were generally higher than on comparable loans traded in the market.
- Terms banks rarely use: because lenders usually hold the loan until it is repaid, loans can include a share of the company for the lender (an equity component, often warrants), high prepayment penalties, or a role in overseeing the company. Average terms have been about 5 years.
SBICs: Small Business Investment Companies are private funds licensed and regulated by the SBA that lend to and invest in US small businesses. The SBA says a typical SBIC loan is $250,000 to $10 million at 9% to 16% interest; loans that come with a share of the company typically carry 10% to 14%. SBICs typically look for mature, profitable businesses with enough cash flow to pay the interest.
Many private credit loans are made to companies owned by private equity funds, to help pay for a buyout or an acquisition.
Upsides and downsides
Upsides
- Larger and more flexible loans than a bank may offer, with terms negotiated directly with the lender
- Can be arranged faster and with more certainty than a bank loan or a public bond
- Owners keep control, unlike selling a large share to investors
Downsides
- Costs more than bank debt
- Floating rates, so payments rise when interest rates rise
- Prepayment penalties and covenants limit what you can do while the loan is outstanding
Risks
- If cash flow falls, interest can take most of what the business earns; in the Federal Reserve's sample, borrowers' earnings averaged only about twice their interest
- Missing a covenant can let the lender demand repayment or take more control
- An equity component dilutes the owners if the lender takes up its shares
What it costs
- How it is priced
- A floating rate above a benchmark such as SOFR, higher than a bank loan; SBIC loans typically 9% to 16% a year
- Typical range
- SBIC loans 9% to 16% a year (SBA); 10% to 14% when the loan comes with shares
- Costs that are easy to miss
- High penalties if you repay early
- A share of the company, such as warrants, on some loans
- Covenants, regular reporting and sometimes a say for the lender in how the company is run
- Legal and due diligence costs for the loan
SBIC loans are typically $250,000 to $10 million. Private credit funds' loans averaged more than $80 million from 2022 in the Federal Reserve's sample.
Does it fit?
Could fit when
- You run an established company with yearly sales of $5 million or more and need money for growth, an acquisition or refinancing
- Owners are selling or a buyer is buying the business, and the deal needs debt alongside equity
Unlikely to fit when
- The business is not making sales yet
- The business is making a loss, so it would struggle to pay the interest
- The business is new (private credit lenders and SBICs look for established businesses)
- You need less than $250,000, which is below what most of these lenders do
Who can use it
- Business types: Partnership, LLC, S corporation, C corporation, Benefit corporation
- Usually needs a profitable business
- An established company with enough steady cash flow to pay the interest
- SBICs lend only to US small businesses (at least 51% of employees and assets in the US) outside excluded industries such as farmland, real estate and finance
Am I ready?
What a provider is likely to ask for. Tick what you have. Your ticks stay in this browser and nothing is stored. Checklist for all asset-based and specialist lending
0%
0 of 4 ticked
- Audited financial statements
- Cash flow forecast
- Debt schedule
Regulation and protections
Regulators: U.S. Securities and Exchange Commission (SEC); U.S. Small Business Administration (SBA); Consumer Financial Protection Bureau (CFPB).
Who runs it: Private providers, nationwide.
The lender is not a bank, so bank lending rules do not apply to the loan. Fund advisers answer to the SEC or a state, and SBICs to the SBA, but those rules mainly protect their investors. The Equal Credit Opportunity Act (Regulation B) covers business credit from any lender, so you cannot be refused on a prohibited basis such as race, sex or religion.
Federal Truth in Lending rules (Regulation Z) do not cover business loans. Read the covenants, prepayment terms and any equity component as carefully as the rate.
Types of provider: Private credit funds and direct lenders; Business development companies (BDCs); Small Business Investment Companies (SBICs) licensed by the SBA.
Small Business Investment Companies (SBICs): 10 examples in the directory · chosen from an official list by a stated rule, never for payment
Also consider
What has changed
No changes since this page was published. It was last checked against its sources on October 20, 2026.
Sources
- Federal Reserve FEDS Notes: Private Credit: Characteristics and Risks (February 23, 2024) · checked October 20, 2026
- SBA: Investment capital (Small Business Investment Companies) · checked October 20, 2026
- SEC: Private funds (how private funds raise money and who regulates their advisers) · checked October 20, 2026
- 12 CFR 1002.4 (Regulation B): general rules, including no discrimination against applicants · checked October 20, 2026
- 12 CFR 1026.3 (Regulation Z): exempt transactions, including business credit · checked October 17, 2026
Something wrong or out of date?
Every fact here comes from a source, and rules and limits change. Email what looks wrong to data@fundladder.uk and, if you can, where you saw the right information. We use your email only to check the correction and reply. Privacy