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Traditional bank loans aren’t what they used to be. Rising interest rates, tighter lending standards, and economic uncertainty have made it harder than ever for small and mid-sized businesses to secure financing. But while banks pull back, private credit is surging.
The private credit market is expected to reach $3 trillion by 2028, and more businesses are turning to non-bank lenders for funding. The question isn’t just whether private credit is a good option—it’s whether businesses can afford to ignore it.
For companies looking to maintain cash flow, invest in expansion, or keep operations running smoothly, private credit is the most viable funding solution available today. But before jumping in, business owners need to understand the benefits, risks, and strategies for using private credit effectively.
Why Private Credit is Expanding—And Why It Matters
For years, banks were the go-to lenders for businesses. However regulatory constraints and economic pressures have forced them to reduce lending, particularly for small businesses. Private credit lenders have stepped in to fill the gap, offering capital with faster approvals, fewer restrictions, and customized terms that banks typically don’t provide.
A few reasons private credit is gaining traction:
- More Flexible Loan Terms: Unlike banks, private lenders can customize repayment schedules and underwriting criteria based on a business’s cash flow, assets, or future revenue potential.
- Faster Access to Capital: Bank loans often take months to process, while private lenders can fund deals in weeks or even days.
- Broader Eligibility: Traditional banks often require pristine credit scores and extensive collateral. Private lenders, on the other hand, focus more on cash flow potential and business performance.
With banks tightening lending, the U.S. small business loan approval rate dropped to just 13% in 2024. That’s why businesses are looking for alternatives—and private credit is increasingly becoming the go-to solution.
The Benefits (and Risks) of Private Credit for Business Owners
The Upside: Why Private Credit is Attractive
Private credit isn’t just about easier access—it also offers a strategic advantage for business owners who know how to use it wisely:
- Preserving Cash Flow: Instead of using company funds to finance growth, private credit allows businesses to keep liquidity available for other priorities.
- Funding Expansion Without Equity Dilution: Unlike venture capital, private credit doesn’t require giving up ownership or control.
- Industry-Specific Financing: Many private credit lenders specialize in sectors like tech, manufacturing, and healthcare, making it easier to secure funding tailored to specific business needs.
The Risks: What Business Owners Need to Watch For
Private credit isn’t free money. While it provides flexibility, it also comes with potential downsides:
- Higher Interest Rates: Private loans often have higher rates than traditional bank loans, reflecting the increased risk lenders take on.
- Lack of Regulatory Oversight: Unlike traditional banks, private lenders operate with less oversight, which can increase financial risk if borrowers aren’t careful (Financial Times).
- Debt-Driven Growth Risks: Overleveraging can lead to cash flow strain, making it harder to meet repayment obligations in downturns.
A smart funding strategy means balancing opportunity with risk. Business owners should be clear on their cash flow strategy before taking on private credit, ensuring that borrowed capital contributes to measurable returns, not just short-term fixes.
How to Use Private Credit Wisely
For business owners considering private credit, the goal isn’t just securing funding—it’s making sure it aligns with long-term financial certainty. Here’s how to approach it strategically:
1. Assess Your Real Financing Needs: Before pursuing private credit, business owners should pinpoint exactly why they need funding. Is it for working capital? Equipment? Expansion? If the loan doesn’t support cash flow-positive activities, it’s a red flag.
2. Choose the Right Lender: Not all private credit lenders operate the same way. Some focus on cash-flow lending, while others specialize in asset-backed financing or revenue-based repayment models. Research lenders and compare:
- Loan terms and repayment schedules
- Interest rates and fees
- Lender experience in your industry
3. Structure the Deal to Your Advantage: A well-structured loan shouldn’t disrupt cash flow—it should enhance it. Consider negotiating:
- Longer repayment terms to reduce short-term cash strain
- Revenue-based repayment models that flex with business performance
- Lower prepayment penalties in case you want to pay off debt early
4. Monitor Cash Flow and Adjust Accordingly: Private credit works best when integrated into a business’s overall cash flow strategy. Business owners should:
- Track debt service coverage ratios to ensure they’re not overleveraged
- Compare financing costs to expected returns before committing
- Reassess funding needs regularly to avoid unnecessary debt accumulation
The smartest business owners use private credit to optimize cash flow, not patch short-term gaps.
Conclusion
The rise of private credit has created new funding opportunities for businesses, but it’s not a one-size-fits-all solution. Entrepreneurs who understand how to strategically integrate private credit into their financial planning can use it as a powerful tool for growth—without falling into the trap of overleveraging.
Before taking on private credit, business owners should ask the right questions:
- Does this funding align with my long-term priorities?
- Can my business handle the repayment structure?
- Am I using this capital for sustainable growth—or just plugging cash flow gaps?
By thinking beyond just securing funding and focusing on engineering financial certainty, business owners can navigate economic shifts with more confidence—and more cash in hand.
Sources
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