Private credit explained for founders

Private credit has become one of the fastest-growing sources of funding for companies of all sizes. At its core, it is debt financing from nonbank entities and private funds, negotiated privately rather than issued in public markets. 

Understanding private credit is important for founders and finance leaders because it provides access to capital when traditional bank lending is limited or equity financing feels too costly.

In recent years, private credit has grown into a major asset class. The growth reflects both demand from businesses for flexible financing and supply from investors seeking higher returns than they might find in fixed income markets.

This article will explain what private credit is, how it works, the financing structures available, and the potential risks. By the end, you will have a clear understanding of this funding option and how to evaluate it alongside other pieces of your capital structure.

What is private credit?

Private credit refers to loans negotiated directly between borrowers and financing providers outside of public markets. Instead of going through a bank, companies work with nonbank entities or private funds that provide capital under customized terms. These agreements are not syndicated loans traded widely but rather individually structured transactions.

For investors, private credit has become an asset class that sits between traditional fixed income and private equity. It provides opportunities for higher yields, though it can be illiquid compared to public bonds. For companies, it represents an increasingly common way to raise capital when public markets are not accessible or when a more customized approach is needed.

How private credit works

The process begins with origination. Interested applicants approach private credit managers or nonbank lenders, who review the company’s financials, growth plans, and capital structure. Underwriting follows, often with more flexibility than traditional bank lending.

Covenants are a key part of these agreements. They set expectations and serve as a form of risk management. Borrowers agree to these terms in exchange for access to capital.

Pricing is negotiated between the two parties. A private credit loan may carry a floating rate tied to a benchmark, or a fixed income-style rate. Interest rate spreads tend to be higher, reflecting the customized nature of the financing. Depending on the risk profile, the loan may be investment grade or structured as high yield.

One important feature is that private credit investments are generally illiquid. These loans cannot easily be sold in a secondary market. That illiquidity means both must think carefully about terms, repayment schedules, and the alignment of interests over time.

Types of private credit financing

Private credit is not a single product but a category that includes multiple financing structures. Each option has its own role depending on the business’ stage, business model, and goals.

1 - Direct lending

Direct lending is the most common form of private credit, where they provide loans directly to companies without syndication. For startups, this may include unsecured or lightly secured facilities to support working capital or expansion.

2 - Venture debt

Venture debt is designed for venture-backed companies, providing non-dilutive funding alongside equity. It typically supports SaaS, hardware, or CPG businesses that have strong investors on their cap table but want to extend their runway without raising another round of equity.

3 - Revenue-based financing

With revenue-based financing, repayment is tied to a percentage of monthly sales. It works well for companies with recurring revenue streams and provides flexibility when cash flow fluctuates.

4 - Asset-based lending

Asset-based lending, commonly called ABL, is funding secured by collateral such as receivables, inventory, or real estate. They can scale with the growth of a company’s balance sheets and provide lower-cost capital compared to unsecured debt.

5 - Mezzanine debt

Mezzanine debt sits between senior loans and equity in the capital structure. It often comes with equity features such as warrants. It is more expensive than senior debt but can provide flexible growth capital.

6 - Specialty structures

Certain borrowers may use products like purchase order financing, invoice factoring, or trade finance. These provide liquidity against specific transactions or contracts.

Across these types, private credit funds and private credit managers tailor terms to match the individual’s or business’ needs. The range of structures is broader than most bank lending, but it also requires careful evaluation to understand covenants, tranches, and potential liabilities.

Why founders turn to private credit

For many founders, private credit represents a middle ground between equity financing and traditional bank loans. It provides capital on terms that can be shaped to the company’s growth path, which makes it a valuable option when other sources fall short.

Flexibility in structure

Private credit agreements can be tailored to the specific circumstances. Repayment schedules, covenant packages, and collateral requirements are negotiable, which allows companies to align financing with revenue cycles or strategic milestones. This flexibility is particularly important for businesses in sectors with uneven cash flow, such as SaaS companies with upfront costs or hardware startups with long production timelines.

Non-dilution of ownership

A private credit loan provides access to capital without giving up equity. For founders and early employees, maintaining control of the company is often as important as raising money. Private credit helps extend runway, finance growth, or fund acquisitions while keeping ownership intact, something equity financing cannot offer.

Capacity for scale

Private credit can support larger funding needs than many traditional bank loans. Whether it is building inventory for a consumer brand, financing receivables in a B2B business, or underwriting expansion into new markets, private credit offers facility sizes that match the scale of capital-intensive industries, including SaaS, CPG, hardware, and real estate.

Speed of execution

Bank lending is often slowed by regulatory oversight and strict capital requirements. Private credit lenders, in contrast, can originate and close loans more quickly. For companies facing time-sensitive opportunities, the ability to access capital in weeks instead of months can make a material difference.

These advantages come with tradeoffs. Interest rate spreads are typically higher than with bank loans, reflecting both the illiquidity of the market. Liquidity risk means the borrower can’t easily refinance or exit a facility in a secondary market. Covenants also require close attention, as they can limit strategic flexibility if not negotiated carefully.

Still, for founders who need speed, flexibility, and scale without giving up ownership, private credit is a powerful alternative. 

The growth of private credit

Private credit’s rise is one of the most notable shifts in modern finance. After the global financial crisis, regulatory reforms such as Basel III and Dodd-Frank raised capital requirements for banks, forcing them to scale back lending, especially to middle-market companies. That gap created an opening for private funds to expand.

In the decade since, the private credit market has multiplied in size. What was once a niche product has become a multi-trillion-dollar asset class, attracting allocations from institutional investors, asset managers, and private equity firms. Bloomberg and other market trackers estimate that assets in private credit have tripled over the last ten years, with growth continuing despite volatility in capital markets.

Borrower demand has kept pace. Middle-market companies that previously depended on bank lending now rely on private credit firms for tailored financing structures. Larger corporate borrowers have also entered the market, seeking flexibility not available through syndicated loans or public markets.

Investor supply is equally strong. Pension funds, sovereign wealth funds, and business development companies (more on them below) have all increased allocations to private credit, viewing it as a way to earn higher returns, diversify investment portfolios, and access opportunities beyond public markets. Allocations that once went almost entirely into fixed income now increasingly include private credit exposure.

The result is a private capital ecosystem that has expanded rapidly in recent years and shows no signs of slowing. For founders, this means a deeper pool of lenders, a broader range of structures, and more competition among providers, all of which translate into more choice when considering how to fund growth.

Potential risks and tradeoffs

Private credit can unlock capital that founders might not find elsewhere, but it comes with important tradeoffs. Founders need to weigh these risks carefully before taking on a facility.

Higher cost of capital

Private credit loan pricing is generally higher than traditional bank loans. Interest rate spreads reflect both credit risk and the illiquid nature of the loans. Many facilities are structured with a floating rate, which means costs can rise when benchmarks increase. For companies already managing tight margins, that volatility can strain cash flow.

Illiquidity

Private credit loans are illiquid by design. They cannot be traded easily in a secondary market. Once the facility is signed, the borrowers should expect to carry it through to maturity. This makes it harder to refinance quickly if business conditions change.

Credit risk and covenants

The risk profile of a private credit loan depends heavily on the borrower’s financial health and the collateral supporting the deal. Financiers often impose covenants to manage risk. While they are protected, they can also restrict their ability to raise additional debt, make acquisitions, or adjust strategy. Breaching them can trigger penalties or accelerate repayment, which can be especially disruptive in a downturn.

Volatility and default risk

Private credit is sensitive to economic cycles. In periods of volatility, default rates tend to rise, particularly among companies with weaker balance sheets or short-term obligations. A restructuring process can be costly, time-consuming, and distracting for management.

Operational complexity

Private credit deals often involve more negotiation, documentation, and monitoring. They must dedicate time and resources to managing lender relationships and ensuring compliance with reporting requirements.

Despite these potential risks, private credit remains a valuable part of the financing toolkit. By understanding the tradeoffs in advance, they can prepare stronger financial forecasts, negotiate more effectively, and align their liabilities with long-term growth goals.

Comparing private credit with public markets

Key players in private credit

The private credit market is shaped by a diverse set of players, each with a different role in how capital is raised, structured, and deployed. Understanding who they are helps founders see where capital originates and how deals are put together.

1 - Private credit funds

Private credit funds are investment vehicles dedicated to direct lending. They pool money from institutional investors and deploy it into private credit loans across industries and deal sizes. 

2 - Business development companies (BDCs)

BDCs are publicly traded investment vehicles created to increase capital flow to small and middle-market companies. For founders, BDCs can be a potential source of growth capital when other private credit funds are focused on larger deals.

3 - Private equity

Private equity firms play two roles in this ecosystem. First, they often use private credit to finance acquisitions and support portfolio companies. Second, some private equity firms have launched private credit funds of their own, blurring the line between equity and debt capital providers.

4 - Asset managers

Large global asset managers allocate investor capital into private credit as part of their fixed income strategies. They diversify investment portfolios by adding private credit exposure, often targeting higher returns and lower correlation with public markets. Their participation has fueled the growth of the private credit market, increasing both liquidity and deal volume.

5 - Private credit firms

Specialized firms focus entirely on private credit. They handle origination, underwriting, pricing, and ongoing management of loans. These groups often bring deep sector knowledge, which allows them to customize structures for borrowers in industries such as SaaS, CPG, or real estate.

Together, these players make private credit an accessible and flexible asset class for companies. They provide the liquidity, underwriting capacity, and risk management expertise that allow borrowers to secure financing tailored to their needs. For founders, knowing who the decision-makers are can shorten the path to the right type of funding.

How Rho helps founders approach private credit

Private credit can be complex, with many structures, covenants, and pricing models. For founders, the challenge is to evaluate the right fit for their stage and capital structure.

Preparation is key. Founders should be ready with financial statements, forecasts, and a clear use of proceeds. Comparing offers across can highlight differences in interest rate spreads, covenant packages, and repayment terms. Attention to liquidity risk is also important, as illiquid loans lock in capital structures for the term of the facility.

Founders should view private credit as one option within a broader set of investment strategies. The right decision depends on growth goals, tolerance for covenants, and appetite for non-dilutive but potentially higher-cost funding.

At Rho, we provide modern finance tools that help founders manage capital with clarity and control. Whether considering private credit or other financing options, we give you the infrastructure to make informed decisions. If you’re ready to take the next step, sign up for Rho today.

FAQs about private credit

What is the difference between private credit and private equity?

Private credit involves loans from nonbank providers, while private equity involves ownership stakes. Borrowers use private credit to access debt financing without dilution, whereas private equity investors take equity positions.

Are private credit investments considered illiquid?

Yes. Private credit investments are generally illiquid because they are not traded in public markets. They should expect to hold the facility until maturity.

What kinds of borrowers typically use private credit?

Corporate types across industries use private credit, especially middle-market companies and startups that need customized financing structures.

What are the potential risks for startups using private credit?

Potential risks include higher pricing, liquidity risk, covenants that restrict flexibility, and credit risk if performance falters.

How fast can private credit funding be arranged compared to traditional bank loans?

Private credit loans can often close within weeks, depending on underwriting and due diligence, whereas bank loans may take longer due to regulatory oversight and capital requirements.

Are private credit loans typically floating-rate or fixed-rate?

Many private credit loans are structured with a floating rate tied to a benchmark, though some may have fixed-income–style terms. The choice depends on negotiations and risk profile.