Bank Loan vs Private Credit
A bank lends deposits it must protect. A fund lends capital it was raised to deploy. Everything else about the two loans — the price, the speed, the covenants, the patience — follows from that.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A bank lends deposits it must protect, so it prices low, secures well, lends against cash flow it can see, and says no to what it cannot. A private credit fund lends investors' capital it was raised to deploy, so it prices high, structures to the deal, lends against earnings a bank will not, and is faster while the deal is being done and less patient when it goes wrong. Invoice finance sits between them, funding the ledger itself. The right lender is the one whose money matches how yours comes back — and a business that could get a bank's terms should take them.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// MAKE THE CALL
Issue 01 — Pacific Premium Foods. Revenue's grown 50% in two years. Operating cash flow flipped negative. The MD wants more facility. Your call first, then the senior banker's.
// 01 — WHOSE MONEY IT IS
Start there, because every other difference is downstream of it. A bank lends money that depositors left with it and expect back on demand, under a regulator who requires it to hold capital against every loan and to lend in ways that can be explained to a supervisor. How Banks Work is that machine in three words: deposits, loans, payments. The money is cheap because it is safe, and it is safe because the bank is careful with it — which is what a borrower is experiencing when the bank asks for security, sets covenants, and says no.
A private credit fund lends money that investors gave it on purpose, for years, in exchange for a return well above anything a deposit pays. Nobody can withdraw it on demand and no regulator requires the fund to hold capital against it, so the fund can lend where a bank cannot. But every loan must earn the return the investors were promised, or the fund has failed its own backers. That is why the money is dear, why the fund is willing to take risk, and why it is less willing to wait.
// 02 — THE TWO LOANS, SIDE BY SIDE
Speed · bank: a credit process with a committee at the end · fund: a deal team that can decide in weeks
Structure · bank: standard products, amortising, secured · fund: shaped to the deal, often bullet, often against earnings
Security · bank: the assets, and usually the owner · fund: the enterprise, sometimes the equity, sometimes a second charge
Covenants · bank: a standard set, tested to keep it informed · fund: a negotiated set, tested to give it rights
When it goes wrong · bank: works it out first, for years if it can · fund: acts, because its investors' return is on the clock
None of these is a criticism of either. A bank that behaved like a fund would be lending depositors' money at fund risk, and a fund that behaved like a bank would be earning a bank's margin on money that costs it far more. Each is doing what its money requires. The borrower's job is to know which kind of money the need calls for.
// 03 — WHAT EACH ONE READS
Both read the same three things — will the money come back, is the lender paid enough for the risk, what is the way out — and weight them differently. A bank leans on the first and third: cash flow that covers the debt through a bad year, and a second way out in the security if it does not. It lends against what it can see and hold, and its price comes from a rating the second line built. A fund leans on the first and second: the earnings of the enterprise as a whole, measured as a multiple of EBITDA, and a price that clears the return its investors require. It is more willing to lend against earnings without hard assets behind them, and it structures the covenants to give it rights early rather than to keep it informed.
So the same business gets a different reception. A manufacturer with good earnings, a full plant and an owner willing to guarantee is a bank's file, and it should be — the bank's money is the cheapest patient money there is. A services business buying a competitor, with strong earnings and nothing to mortgage, is closer to a fund's file, because the bank's second way out is not there and the fund is paid for its absence.
// 04 — WHEN A FUND IS THE RIGHT ANSWER
When a bank has said no for a reason that is real but survivable. The no usually names a thing — leverage past the bank's line, security that does not cover, an industry the bank has enough of, a change of ownership it cannot underwrite — and a fund is priced to carry exactly those things for a time. When the need is faster or larger than the bank's process allows: an acquisition with a deadline, a buy-out of a retiring partner, a growth step that outruns the bank's appetite. And when the business is in a turnaround the bank's watch list cannot hold, where a fund that has read the recovery will lend into it at a price.
When it is the wrong answer: as a substitute for equity, or as a way around a bank's no that was right. A fund's loan against a business the bank declined because the cash flow was not there does not fix the cash flow; it adds a dearer claim on it and a lender less inclined to wait. Issue 01 is a business whose growth had quietly run ahead of its cash — a bank declined the larger line, and the reason it declined would not have gone away at a higher rate.
// 05 — INVOICE FINANCE, BETWEEN THE TWO
A third kind of lender reads neither the balance sheet nor the enterprise, but the ledger. Invoice finance advances a percentage of a business's eligible unpaid invoices and moves with them: as customers pay, availability falls; as new invoices are raised, it rises. Banks offer it beside the overdraft and specialists offer it as their whole business, and it sits between the other two in price and in temperament — dearer than a bank's line, cheaper than a fund's loan, quicker than either to reflect a business whose debtors have stopped paying. It is the answer for a business whose cash is trapped in customers rather than in assets or in earnings, and it is the wrong answer for one whose debtors are the problem, since the dilution the financier watches is the same thing the bank saw.
// 06 — HOW A BANKER READS A BORROWER WHO HAS BOTH
With care, and in a particular order. A fund's loan behind the bank's is a claim on the same cash flow, so the desk re-runs the cover with both sets of repayments and reads the intercreditor terms for what the fund may do and when. A fund's loan that refinanced the bank tells the next bank something: either the business grew past its old bank's appetite, or its old bank saw something. The refinancing guide sets out which reasons for leaving travel well and which do not. And a business that came back to a bank from a fund, with its leverage down and its earnings proven, is the best kind of new file — the fund did what funds are for, and the bank gets the business it could not have lent to three years earlier.
// 07 — SO WHICH ONE
If a bank will lend on terms that fit the need, borrow from the bank; it is the cheapest patient money available and it will work with you longer when things go wrong. If the bank's no names something a fund is priced to carry for a while — leverage, a thin security position, a deadline — and the cash flow is really there, a fund is the right bridge, taken with a plan to come back. If the cash flow is not really there, neither lender fixes it. Read your own file the way the bank will, with How Banks Read You and the Five-Step Read, before deciding whose money you need.
// QUESTIONS PEOPLE ASK
- What is private credit, in plain words?
- Lending by a fund rather than a bank. The fund raises capital from investors — pension funds, insurers, wealthy families — who were promised a return well above a deposit rate, and lends it to businesses the fund's managers have read themselves. There is no depositor to protect and no branch network to run, so the fund can price higher, structure each loan to the deal, and lend where a bank's policy says no. The money is dearer, faster and more flexible, and the fund holds the loan itself rather than selling it on.
- Why is private credit more expensive than a bank loan?
- Because of whose money it is. A bank lends deposits that cost it little and that a regulator requires it to protect, so it can accept a thin margin on a well-secured loan to a business whose cash flow it can see. A fund lends capital its investors expect a high return on, so every loan must earn that return or the fund has failed its own lenders. The extra price is not a penalty; it is the cost of borrowing from someone who was promised more than a depositor and will take a risk a bank cannot.
- When does a private credit loan make sense for a business?
- When a bank has said no for a reason that is real but survivable, or would say yes only to a facility too small or too slow for the need. Acquisitions, a change of ownership, a business with strong earnings but thin security, a turnaround that a bank's watch list cannot hold, a growth step that outruns the bank's appetite for the industry — these are the fund's natural files. A business that could get a bank's terms should take them: the cheapest patient money is still the bank's.
- What does a private credit lender look at that a bank does not?
- Mostly the same things, weighted differently. Both read cash flow, leverage and the way out. A bank leans on the security and on covenants that keep it informed early, and prices from a rating; a fund leans on the enterprise's earnings and on a covenant package it negotiated itself, and prices from the return its investors need. The fund is usually more willing to lend against earnings rather than assets, and less willing to wait — a fund that has to act will act, where a bank's first instinct is to work it out.
- Is invoice finance a bank product or private credit?
- Either, and it sits between the two in how it behaves. Some banks run invoice finance as a product beside the overdraft; specialist financiers run it as their whole business. What makes it different from both a bank loan and a fund's loan is what it lends against: the ledger of unpaid invoices itself, with an advance rate against eligible receivables and availability that moves with the debtors. It funds a business whose cash is trapped in customers who pay slowly, at a price above a bank's line and below a fund's loan, and it can be the answer when neither of the other two fits.
// READ A NO FROM THE INSIDE
Issue 01 is a good business, a bigger line, and a senior banker who declined it. Make the call, then read why — and ask whether a dearer lender would have changed anything.
Work Issue 01 →