After this year’s regional banking crisis, banks are again tightening their lending standards, pushing more borrowers, specifically small and medium-sized businesses, into the arms of private credit lenders.

Unlike their larger-cap peers, medium-sized/middle-market companies with annual revenues between $10 million and $1 billion, are frequently too small to tap the public bond market, so they’ve historically turned first to commercial banks for debt financing. However, with traditional lenders employing stricter lending standards at a time when many businesses are still recovering from the effects of COVID-19 closures, supply chain delays, inflationary cost increases, and a tight labor market, private credit and non-traditional lenders are increasingly becoming a viable alternative for many businesses.

In our last article (Private Credit: Tailored Solutions Beyond Traditional Bank Lending) we discussed the rise of private credit and the role it is playing in the marketplace. In this article, we will focus on the steps businesses can take to secure private credit funding. It is important to note that in this article we are not promoting private credit, but rather educating our clients on this financing alternative and how they might position themselves to take advantage of this lending option for their business.

How to Navigate the Private Credit Market Successfully

While the private credit market may have operated in the shadows for some time, its significance has grown exponentially over the past decade. This alternative financing landscape, driven by non-traditional lenders, has attracted a diverse array of participants seeking unique credit opportunities and tailored financial solutions.

Approaching the private credit market requires careful consideration and a well-thought-out strategy. This alternative financing avenue offers borrowers unique financing options, but it also comes with its own set of challenges. Here are seven essential steps to guide you in navigating the private credit market successfully:

1. Define Your Financing Needs

Before entering the private credit market, clearly define your financing needs and objectives. Assess how much capital you require, the purpose of the funds, your collateral position, and the desired terms for the loan. Understanding your financial needs will help you target the right private credit lenders who can offer customized solutions.

2. Research and Identify Potential Lenders

Research is key to identifying reputable and reliable private credit lenders. Look for firms with a solid track record of successful lending and a good reputation in the industry. Consider the types of companies and industries they usually lend in to ensure they align with your business model and goals. Chances are, if they have experience lending to similar businesses to yours, they will understand the nuances of not only your business but the customers you serve. The key is to find a value-added partner for your business, not just someone who will loan you money.

3. Build Relationships

Establishing strong relationships is crucial in the private credit market. Similar to traditional lenders, private credit lenders prioritize relationships with borrowers. Attend industry events, networking functions, and conferences to connect with potential lenders. Building a rapport and showcasing your company’s potential can enhance your chances of securing funding.

What if you don’t have time for this or you don’t know where to start? Utilize a Financial Advisor (a.k.a. FA) who has experience with capital sourcing to help you. Many FAs have in-depth knowledge of the private credit market, including its intricacies, trends, and the key players involved. They can provide valuable insights into the various lending options available, the types of deals that are common, and the typical terms and conditions in the market. This expertise allows you to make more informed decisions when approaching potential lenders.

4. Prepare a Comprehensive Business Plan

To gain the confidence of private credit lenders, or any lender, present a comprehensive and well-thought-out business plan. Include detailed financial projections, a clear explanation of how you intend to use the funds, and the steps you’ll take to ensure timely repayment. A robust business plan demonstrates your professionalism and commitment to the success of your venture.

Honesty and transparency are essential when dealing with any lender, including private credit lenders. Provide accurate and up-to-date financial information and be forthright about any challenges your business may be facing. Demonstrating openness will help build trust with potential lenders.

If your business is going through a period of stress or distress, your turnaround plan is your business plan. All the points made above hold true for your turnaround plan, build trust through open and honest communication. Again, you are looking for a lender that will be your partner, so it’s important that they understand where your business is in its life cycle.

5. Understand the Terms and Risks

Carefully review and understand the terms of the loan, including interest rates, fees, prepayment penalties, repayment schedules, reporting requirements, and any covenants attached to the financing. Be aware of the risks involved, as private credit loans often come with higher interest rates and may have less favorable terms compared to traditional bank loans.

Financial advisors that specialize in capital sourcing have established relationships with a network of non-traditional lenders. These FAs can provide you with access to a broader range of potential lenders, increasing the likelihood of finding the right fit for your financing requirements.

6. Seek Professional Advice

The private credit market offers unique financing opportunities for businesses seeking tailored solutions beyond traditional bank lending. By conferring with a financial advisor, you can tap into their expertise, gain access to a network of lenders, and receive personalized guidance throughout the financing process. With their assistance, you can position your business for success in the private credit market and secure the funding needed to achieve your strategic objectives.

They can help you navigate the complexities of the market to ensure the financing aligns with your long-term goals by helping you with the following:

Assistance with Due Diligence
FAs can help you navigate the due diligence process, which is a critical aspect of securing private credit financing. They can assist in preparing the necessary documentation, financial statements, and other materials required by lenders, ensuring that your loan application is well-prepared and presents your business in the best possible light.

Negotiating Favorable Terms
Financial advisors are skilled negotiators who can advocate on your behalf during the financing process. They can help negotiate favorable terms, including interest rates, repayment schedules, and covenants, ensuring that the financing aligns with your long-term goals and cash flow capabilities.

Risk Management
Entering the private credit market involves inherent risks, and financial advisors can help you understand and manage these risks effectively. They can identify potential pitfalls and advise on risk mitigation strategies to protect your business and financial interests.

Efficient and Timely Process
Navigating the private credit market can be time-consuming and complex. Engaging a financial advisor can streamline the process, ensuring that you meet deadlines, make informed decisions, and avoid common pitfalls that could delay or jeopardize your financing efforts.

7. Stay Committed to Your Business Goals

Finally, demonstrate your commitment to the success of your business. Private credit lenders are more likely to lend to companies with a clear vision, a strong management team, and a solid strategy for growth and profitability.

The private credit market might be right for your business, but successfully navigating it requires a well-prepared and thoughtful approach. By taking the steps we have outlined above, you can position yourself to access the unique opportunities offered by the private credit market to ultimately achieve your business goals.

If you are interested in the private credit market but you’re still unsure if you’re prepared to navigate through the process, JACO’s experienced team can help. Give us a call, or drop us an email so we can learn more about your business and what you are looking to achieve.

About Jeff

Jeff has over 25 years of strategic planning, business development, and business transformation leadership experience. Having worked with mid-market, closely-held and family-owned businesses his entire career Jeff has a unique understanding of how these enterprises operate and the challenges they face.

He is passionate about working with business leaders to build strong cultures while developing and executing strategies that deliver exceptional results that benefit all the company’s stakeholders. Jeff’s hands-on approach to working with companies begins with a commonsense approach to strategy development.

With extensive experience in organizational turnaround and growth Jeff follows a defined process (disciplined, focused, intentional) to guide clients from strategy to execution. His experience covers a multitude of industries, with an in-depth understanding of automotive manufacturing.

Jeff holds a Master’s in Business Administration from the Capital University School of Management and earned a Bachelor of Arts in Business Administration and Management from Ohio Dominican University.