What Is Private Credit?

By: Bella Gould

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October 28, 2025 at 12:29 PM PDT

Private credit refers to non-bank lending in which funds are provided directly to borrowers by private investors or institutions. It plays a vital role in today’s financial market by offering an alternative source of capital—particularly for small and medium-sized businesses that may struggle to secure loans through traditional banking channels.

There are several main types of private credit. Direct lending involves loans made directly to businesses without intermediaries, often with tailored terms suited to the borrower’s specific needs. Mezzanine financing combines elements of debt and equity, typically used to fund growth or acquisitions and offering higher potential returns in exchange for higher risk. Distressed debt investing focuses on purchasing the debt of financially troubled companies at a discount, aiming to restore them to profitability and realize gains as their condition improves.

Private credit funds play a central role in this ecosystem by pooling investor capital and lending to businesses, frequently specializing in certain sectors or borrower profiles. These lenders perform detailed risk assessments, often requiring collateral or personal guarantees to protect their investments. Deals are typically structured with various covenants and safeguards to ensure both flexibility and protection for the lender.

For small businesses, private credit provides numerous advantages. It offers access to funding when banks are unwilling or too slow to lend, along with more flexible repayment terms tailored to each company’s situation. The speed of financing is another major benefit, allowing entrepreneurs to move quickly on new opportunities. However, there are also challenges. Private credit tends to carry higher interest rates due to increased risk and operates under limited regulatory oversight, which can expose borrowers to potential pitfalls.

Additionally, market conditions can significantly influence the availability and cost of private credit, as lenders may tighten standards during economic downturns.

Despite these challenges, private credit is instrumental in supporting economic growth. It helps small and medium-sized enterprises expand, create jobs, and drive innovation. By diversifying the sources of financing available to businesses, it contributes to a more resilient financial system. With greater access to capital, companies can invest in new technologies and improve productivity, benefiting the broader economy.

In conclusion, private credit stands out as a crucial alternative funding source, empowering businesses that might otherwise be overlooked by traditional banks. For small business owners, exploring private credit options can open pathways to growth, stability, and innovation—providing the financial flexibility needed to achieve long-term success.