Private Debt
Private Debt Financing Explained: A Borrower’s Guide to Direct Lending
A practical guide to private debt, direct lending, negotiated terms and the questions borrowers should answer before seeking non-bank financing.
Credit Glorious · · 5 min read
Private Debt Financing Explained: A Borrower’s Guide to Direct Lending
Private debt is credit provided outside the public bond market and, in many cases, outside a traditional bank syndicate. A corporate borrower negotiates directly with a non-bank lender or a small group of lenders, allowing the financing to be structured around a specific company, asset or project.
For borrowers, the attraction is not simply “more capital.” It is the possibility of matching the debt structure to the transaction: the use of funds, expected cash flows, available security, implementation timetable and realistic repayment capacity.
When direct lending may fit
Private debt can be relevant when a company is financing growth, acquiring or refinancing an asset, developing real estate or infrastructure, or bridging a project to a longer-term capital solution. It may also suit transactions that are too specialised for a standard lending product or require a more concentrated decision process.
The International Monetary Fund notes that private credit can offer flexibility, speed of execution and confidentiality because repayment schedules, collateral requirements and other terms can be negotiated between the parties. Those benefits do not make private debt automatically cheaper or easier. The IMF also observes that private-credit borrowers may face higher funding costs and greater interest-rate sensitivity than borrowers using some public-market alternatives.
What a lender evaluates
A lender needs to understand how the debt will be repaid under both the base case and credible downside scenarios. The review normally begins with five questions:
- Who is the legal borrower and who ultimately controls it?
- What exactly will the financing pay for?
- Which cash flows will service interest and principal?
- What assets, contracts or other rights can support the lender’s position?
- What could delay completion, weaken revenue or reduce recoveries?
The answers shape the proposed amount, tenor, amortisation, covenants, conditions precedent and security package. Strong collateral cannot repair an unconvincing repayment plan, just as a promising business plan does not eliminate the need for enforceable documentation.
Private debt is negotiated capital
Unlike a public bond with terms offered broadly to the market, direct lending is usually bilateral or arranged within a small lender group. This creates room for a tailored structure, but it also places more weight on due diligence.
Borrowers should expect scrutiny of historical accounts, management forecasts, existing debt, ownership, legal structure, key contracts, permits, insurance and compliance. Project financings require additional analysis of construction, completion, operations and the allocation of risk among sponsors, contractors, customers and other counterparties.
The trade-off borrowers should assess
The relevant comparison is not only the headline interest rate. Borrowers should compare certainty of execution, total cost, timing, flexibility, reporting obligations, covenant headroom and the consequences of delay or underperformance.
A structure that closes quickly but leaves no operating headroom may be less useful than one with a more disciplined timetable and repayment profile. Equally, a flexible lender still requires reliable information and a credible route to repayment.
Starting the conversation
A strong initial financing request should identify the borrower, transaction, amount sought, use of proceeds, preferred timing, source of repayment and proposed security. It should also disclose existing debt and any material legal, regulatory or project dependencies.
Credit HK assesses private-debt opportunities for incorporated corporate borrowers and project sponsors. Each opportunity is considered individually, subject to underwriting, documentation and compliance review.
Explore Credit HK’s private-debt approach or present a financing opportunity.
Sources and further reading
- private debt
- direct lending
- corporate finance
- non-bank lending