Bank Loan vs Private Credit

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 fund told its investors to expect, 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.

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.

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.

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.

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 invoices do not reliably turn into cash — credit notes, disputes, returns — since that dilution is what the financier studies before it sets terms, and it cuts the advance to what the ledger really collects.

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.

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.