Many founders assume that the only ways to fund the growth of their business are by ‘bootstrapping’ (using their personal resources and any cash the business generates), bank borrowing (which may be insufficiently flexible for scaling businesses) or giving away equity to venture capital firms. But that isn’t necessarily the case. One alternative option is private credit (sometimes known as private debt or direct lending). This route can give founders the capital they need to grow quickly, while still keeping control of – and greater economic interest in – their company.
While high street small business loans can be a great option if you are an entrepreneur just getting started, a private credit arrangement can be more attractive later on once your business is up and running and you want to scale its operations. One of the biggest advantages of private credit lending, compared with standard bank loans, is the greater flexibility it can offer.
Typical terms for private credit
Private lending can also be secured against one or more assets your company owns, such as physical buildings, intellectual property or even contracted revenue streams. This is sometimes called “asset-backed lending.”
Most private credit arrangements tend to involve a fixed term and floating interest rate, but the lender will work with you to tailor the arrangement to suit your company’s specific needs and circumstances. Some investors may even be willing to offer financing terms linked to your business achieving specific ESG targets, such as reduction of carbon emissions.
Do be prepared for the lender to perform extensive due diligence on your business before deciding whether to invest, and to specify some financial restrictions and controls in the terms of the loan, to help them manage their risk. But once the lender is committed, it can often be the start of a long and really useful relationship.
Unlike many private equity investors, institutional lenders don’t expect seats on the board or to be involved in the running of your company. But they can help introduce you to other institutions and help foster more relationships which will increase your potential pool of funding further as your business grows.
Private lending to businesses early in their life-cycle is usually referred to as Venture Debt. As compared to private credit for scaling businesses, this typically features higher interest rates and an option to convert the debt to equity if repayments cannot be met. These features reflect the fact that early-stage businesses are riskier and tend to have few tangible assets against which a loan can be secured.