In lending, cost is easy to compare. Value can be more difficult.
This distinction becomes particularly important when considering private credit. Compared with more conventional sources of finance, privately structured debt may come at a higher cost. Look at pricing alone and the obvious conclusion may be to choose the cheaper facility.
But sophisticated borrowing decisions are rarely made on rate alone.
The more useful question is whether the additional flexibility creates enough value to justify its cost.
What Are You Actually Paying For?
Private credit can provide greater scope to structure a facility around the transaction, rather than requiring the transaction to fit neatly within predetermined lending criteria.
That distinction can become valuable when a borrower has a strong underlying proposition but encounters complexity around timing, income, security, ownership structure, repayment strategy or the purpose of the funds.
The attraction is therefore not simply access to capital. It is the potential ability to structure capital around a particular requirement.
For a property investor, business owner or private client, that flexibility may allow them to execute a transaction that would otherwise be difficult to accommodate through conventional lending.
The premium only makes sense, however, when that flexibility serves a clear purpose.
When Speed Has A Commercial Value
Speed is one of the most frequently cited reasons for considering private credit, but speed should not be viewed in isolation.
The relevant question is what completing quickly allows the borrower to achieve.
Perhaps there is a time-sensitive acquisition. A refinancing deadline may be approaching. Capital may need to be released before another transaction can proceed. Or a borrower may need greater certainty around execution than a conventional credit process can provide.
In those circumstances, the cost of finance needs to be considered alongside the potential cost of delay or losing the opportunity altogether.
This does not automatically make more expensive borrowing appropriate. It does mean that comparing headline rates alone may provide an incomplete picture.
Complexity Can Change The Equation
Some transactions are financially sound but difficult to express within standard lending criteria.
A borrower may have multiple income sources, an unconventional ownership structure, complex assets or a transaction requiring a more bespoke approach to security and repayment.
The same can apply to commercial property. An asset may be mixed-use, have an unusual occupational profile or form part of a wider investment strategy that is difficult to assess through a standardised credit model.
In these situations, flexibility can have tangible value.
The question becomes whether a lender is willing to understand the transaction in its entirety and structure its credit decision accordingly.
Flexibility Should Have An Exit
There is, however, an important distinction between using flexible capital strategically and simply accepting expensive debt because it is available.
A private credit facility should have a clear role within the wider financing strategy.
That includes understanding how the borrowing will ultimately be repaid or refinanced.
For example, private credit might provide an interim solution while an asset is repositioned, income is stabilised, a transaction completes or the borrower reaches a position where longer-term funding becomes appropriate.
In that scenario, the higher-cost facility is not necessarily the destination. It is part of the route towards a different capital structure.
Without a credible repayment or refinancing strategy, flexibility can quickly become expensive.
Cost Should Be Measured In Context
The true cost of borrowing extends beyond the interest rate.
Fees, interest, the proposed term, early repayment provisions and other facility conditions all need to be understood. Equally, borrowers should consider what the capital enables them to achieve and the consequences if funding is not available at the required time or in the required form.
That creates a more useful comparison.
A lower-cost facility that cannot complete within the required timeframe, accommodate the transaction or provide sufficient certainty may ultimately offer less value than a more expensive structure that can.
Conversely, there is little reason to pay a premium for flexibility that the borrower does not need.
The Structure Should Follow The Objective
At Henry Dannell, we believe the starting point should be the objective rather than the lending product.
What does the capital need to achieve? Why is flexibility required? How long is that flexibility likely to be needed? What is the intended exit? And does the value created justify the additional cost and risk?
Only once those questions have been answered does it become possible to assess whether private credit is genuinely appropriate.
Private credit can be a powerful financing tool, particularly where conventional lending cannot accommodate the timing or structure of a transaction. But flexibility is valuable precisely when it solves a defined problem.
The objective is not to find the most flexible capital available. It is to identify the right capital for the strategy.
Private credit and other forms of 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.
