Private credit should fund a transition, not postpone a problem
Higher-cost capital works best when it finances a defined milestone that unlocks a cheaper or more permanent solution. Without that plan, flexibility can become an expensive delay.
Private credit has become an essential part of the UK funding market. It can support transactions that do not fit conventional bank criteria, including development, acquisitions, transitional property, receivables, special situations and complex ownership structures.
Its value is flexibility. A specialist lender can focus on the asset, transaction economics and route to repayment rather than applying a standard bank template. But flexibility only produces a good outcome when the facility is being used to solve a specific, time-limited problem.
The difference between a bridge and a delay
Private credit is most effective where the borrower can identify the event that will change the credit profile. This may be completing construction, obtaining planning, securing a lease, collecting receivables, integrating an acquisition or reaching a point at which a mainstream refinance becomes available.
The risk arises when the facility simply funds continuing losses, postpones an unresolved shareholder issue or relies on future valuation growth without a controllable operational milestone. In those circumstances, the borrower may reach maturity with the same problem, a higher debt balance and fewer options.
A facility should therefore be assessed by what will be demonstrably different at the end of its term.
Five tests before accepting private credit
| • Define the transition. State the exact milestone the facility will finance and the evidence that will prove it has been achieved. |
| • Calculate the all-in cost, including arrangement fees, exit fees, legal costs, monitoring, valuation, minimum interest and rolled interest. |
| • Model monthly liquidity and the fully drawn redemption figure. A borrower should understand the cost of a delay before it occurs. |
| • Confirm that the exit lender or buyer is likely to accept the resulting asset, income profile and capital structure. |
| • Agree a contingency. Identify what can be sold, refinanced, repaid or supported by shareholders if the primary plan is late. |
Price is only one part of suitability
Borrowers naturally focus on the headline interest rate. In specialist finance, structure can be equally important. A slightly more expensive facility may be preferable if it provides sufficient term, realistic covenants, staged drawdowns and the flexibility needed to achieve the business plan.
Conversely, a low initial rate can be misleading where the loan has a short maturity, aggressive default pricing or a structure that forces a refinance before the asset is ready.
How advisers and lenders can improve outcomes
Advisers should distinguish between a transaction that is temporarily outside bank criteria and one that is fundamentally unable to support debt. Private credit should not be presented as a universal answer to an equity shortfall or an unproven business model.
Lenders can make facilities more constructive by linking drawdowns, reporting and covenant relief to meaningful milestones. This gives the borrower a clear route through the transition while protecting the lender if the plan begins to drift.
Used properly, private credit can create value by providing time and certainty at a critical point. Used without a defined transition, it can simply make an existing problem larger.
The best question is not whether private credit is available. It is what permanent improvement the borrower will have bought by the time it must be repaid.
Thomas Pritchard is a director at CharterHCP
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