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What are the differences between bank debt and private credit?

January 17, 2023

When it comes to accessing capital, borrowers have various options to choose from, including bank debt and private credit. Both forms of lending provide borrowers with the necessary funds to finance their projects. However, there are distinct differences between the two that borrowers should be aware of before selecting a lender.

Bank Debt

Bank debt is a form of lending provided by traditional banks and financial institutions. Banks have been the primary source of funding for businesses for many years. They offer a wide range of financing options, including secured and unsecured loans, lines of credit, and equipment financing.

One of the primary benefits of bank debt is its regulatory oversight. Banks are heavily regulated by government agencies, which helps ensure that they follow strict lending guidelines, adhere to standardized underwriting procedures, and maintain high levels of transparency. This regulatory oversight gives businesses confidence that they are dealing with a reputable lender and helps to protect their investments.

However, the regulatory oversight also means that banks have to comply with various government regulations, which can result in a slow lending process. Banks typically have strict credit requirements, requiring businesses and borrowers to have a strong credit history, collateral, and financial statements. The approval process can be lengthy and require extensive documentation, leading to a slower loan origination process.

Private Credit

Private credit refers to lending provided by non-bank lenders, such as private equity firms, hedge funds, and other alternative lenders. Private credit lenders offer a more flexible lending approach than banks, generally with higher lending limits, fewer regulatory restrictions, and more streamlined loan servicing.

Private credit lenders have fewer regulatory requirements than banks. This allows them to offer more flexible lending terms, including higher loan-to-value ratios. This flexibility means that private credit lenders can offer more creative financing options to borrowers that may not meet the strict credit requirements of banks.

Private credit lenders usually have a faster loan origination process when compared with banks. They have streamlined underwriting procedures that enable them to process loan applications quickly, often within days or weeks, compared to the months that it can take for banks. This speed is essential for borrowers that need to access capital quickly to take advantage of time-sensitive opportunities.

This blog post should not be treated as investment or legal advice.