When considering private credit, it is tempting to begin with the terms.
What leverage is available? What will the capital cost? How quickly can the lender complete? What security will they require?
These are important questions. But they should not be the first ones.
The starting point should be much simpler:
What does the capital need to achieve?
Until that is understood, it is difficult to determine whether private credit is the right source of funding at all, let alone how the facility should be structured.
The Assumption We Would Challenge
Private credit is sometimes viewed primarily as an alternative when conventional lending is unavailable.
That understates its role.
There are circumstances where a borrower could potentially access more traditional finance, but the structure, timing or constraints of that facility may not align with the commercial objective.
The relevant comparison is therefore not simply private credit versus bank debt.
It is whether the proposed capital structure allows the borrower to execute their strategy effectively, and whether the value created by doing so justifies the cost and risk of the borrowing.
Start With The Purpose
Consider two borrowers seeking the same amount of capital against similar assets.
One needs to complete a time-sensitive acquisition before refinancing onto longer-term debt.
The other wants additional liquidity but has no immediate requirement for the funds.
On paper, the borrowing requirement could look similar. Strategically, it is very different.
For the first borrower, certainty of execution and flexibility around the initial facility may carry considerable value.
For the second, paying a premium for those same characteristics may be unnecessary.
This is why the use of capital matters.
Different Objectives Require Different Structures
Private credit can potentially support a range of situations, from acquisitions and refinancing to property repositioning, business investment and short-term liquidity requirements.
But the purpose of the capital should influence the structure.
If the funding is being used to acquire an asset, the borrower may place greater emphasis on certainty and speed.
If it is funding a repositioning strategy, the facility may need to accommodate a period before the asset reaches stabilised income or value.
If the capital is intended to bridge the borrower towards a longer-term refinancing, the credibility and timing of that exit become fundamental to the credit decision.
The loan should therefore be structured around what happens next, not simply what can be borrowed today.
Flexibility Has To Create Value
Private credit can offer flexibility where a transaction does not fit comfortably within conventional credit parameters.
That flexibility has a price.
The question is whether paying that price creates an advantage elsewhere.
Does it allow an acquisition to complete that might otherwise be lost? Does it provide time to reposition an asset before refinancing? Does it prevent a premature disposal? Does it allow capital to be deployed into an opportunity where the expected benefit warrants the additional financing cost?
If there is no clear answer, the case for more flexible capital becomes harder to justify.
Private credit should not be selected simply because it is available.
The Exit Is Part Of The Initial Decision
Understanding the use of capital also means understanding how the facility ultimately ends.
If private credit is being used as transitional capital, the proposed exit should be considered before the borrowing is put in place.
That might involve refinancing onto longer-term debt, selling an asset, receiving proceeds from another transaction or reaching a defined point in a wider business or property strategy.
Whatever the intended route, it needs to be credible.
A facility that solves today’s funding requirement but creates a more difficult problem at maturity has not necessarily provided the borrower with flexibility.
It may simply have deferred the issue.
Capital Should Serve The Strategy
At Henry Dannell, we believe private credit conversations should begin with the commercial objective.
What is the borrower trying to achieve? Why is capital required now? What does the funding enable them to do? How long is it genuinely required for? And what is the route out of the facility?
Only then should the conversation move to leverage, pricing, security and lender appetite.
Because the question is not simply whether private credit is available.
It is whether that capital, on those terms, advances the wider strategy sufficiently to justify using it.
Private credit and specialist finance are subject to lender criteria and individual circumstances. Where borrowing is secured against property or other assets, those assets may be at risk if the terms of the facility are not met. Independent legal and tax advice should be taken where appropriate.
