Private credit for lower-middle-market businesses
Private credit used to be a term you only heard in institutional finance. Now it is often the practical answer for a $5M or $50M revenue company that has outgrown its bank's appetite, or never fit it in the first place. Understanding when it makes sense, and when it does not, is worth an owner's time before the need is urgent.
Short answer: private credit is business lending from non-bank institutions: credit funds, specialty finance companies, family offices. For lower-middle-market companies it fills the space banks leave open, with facilities from roughly $1M to $100M spanning asset-based revolvers, term loans, junior capital, and special-situations lending. It makes sense when a company needs more availability, speed, or structural flexibility than a bank offers, and is willing to pay a premium over bank pricing for it.
When private credit makes sense
- The bank said no, but the business is real. Recent losses, fast growth, customer concentration, MCA debt, or thin hard assets all trigger bank declines without making a company uncreditworthy. Private lenders underwrite the story and the collateral.
- Speed matters. Private credit closes in weeks; special-situations desks close some transactions in days. Acquisitions, payoff deadlines, and seasonal ramps do not wait for committee calendars.
- The structure needs tailoring. Interest-only periods, revolvers that scale with billing, junior tranches, sale-leasebacks: structures banks rarely build for companies this size.
- Equity is the alternative. When the other option is selling ownership to fund working capital, debt priced in the teens is usually the cheaper capital by a wide margin.
When the bank is still the right answer
If your company qualifies for conventional bank credit at conventional pricing, take it. Private credit's premium only earns its keep when it buys something the bank will not give: more availability, more speed, more tolerance, more structure. The most credible thing an advisor in this market can tell you is when you do not need what they arrange, and the second most credible is how the private facility you take today gets you back to bank pricing tomorrow. That graduation logic is core to how we structure engagements; we call it Bridge-to-Bank.
What lower-middle-market private credit looks like in practice
The market spans a spectrum. At one end, asset-based revolvers against receivables and inventory, the everyday working-capital tool. In the middle, cash-flow term loans and unitranche facilities for companies with real EBITDA, and junior or mezzanine capital layered behind a senior lender. At the other end, special-situations capital: bridge loans, DIP financing, and rescue structures measured in days. Pricing tracks risk and position: senior asset-based facilities commonly start near 10%, term and junior structures run through the mid-teens and beyond.
Private credit versus bank financing, side by side
- Underwriting: banks lend on history and ratios; private lenders on collateral, receivables, and the forward story.
- Speed: bank processes run months; private credit runs weeks, sometimes days.
- Covenants: bank cash-flow loans carry tight maintenance covenants; private structures are commonly covenant-light, priced for the risk instead.
- Cost: banks are cheapest; private credit carries a premium that buys access and flexibility.
- Relationship: banks offer deposits and treasury alongside credit; private lenders offer credit expertise and tolerance for complexity.
How an advisory changes the outcome
The private credit market is opaque by design: hundreds of lenders, each with a specific box of sizes, industries, structures, and risk appetites, none of it published. A company shopping alone typically finds whoever markets loudest, which correlates with expensive. An advisor structures the file once, runs it across the relevant desks simultaneously, and negotiates terms head to head. Modavva is lender-agnostic by design; we work for the operator, and the network spans startup-scale factoring through $100M institutional facilities.
Common questions
When does private credit make sense instead of a bank loan?
When the bank's answer is no, slow, or too small, and the business case for the capital is strong: growth to fund, expensive debt to refinance, an acquisition with a deadline. If a bank will do the deal at bank pricing, take the bank; private credit earns its premium only when it buys availability or flexibility the bank will not offer.
What size company does private credit serve?
In the lower middle market, facilities commonly run from about $1M to $100M, serving companies from roughly $2M to several hundred million in revenue. Below that range, factoring and specialty products cover the need; above it, the broadly syndicated market takes over.
Is private credit the same as private equity?
No. Private credit is debt: it gets repaid, and you keep your ownership. Private equity buys ownership. Companies often consider both at the same crossroads, and the working-capital problems that push owners toward selling equity are frequently solvable with structured debt instead.
What does private credit cost?
Senior asset-based facilities commonly start near 10% annually; term, unitranche, and junior structures run through the mid-teens and higher, plus closing costs. Expensive against a bank, cheap against equity dilution or merchant cash advance pricing, which is the comparison that usually matters.
How do we start a private credit conversation?
With your numbers: financials, an A/R aging, a debt schedule, and a clear statement of what the capital does. A confidential review against those documents tells you within days which parts of the market are realistic and at what terms. Modavva provides that review at no cost.
Exploring private credit for your company?
Tell us where things stand. A Modavva advisor will review your situation confidentially, at no cost and with no obligation, and come back with whether and how it can be restructured. Typically a same-week first response.
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