Private Credit for Startups and Growth Companies

A company with $18 million of recurring revenue, growing well, still losing money, walks into a commercial bank and is politely declined. No profitability, no hard assets, no personal guarantee on offer. The bank's credit box does not contain this company.

The same company walks into a private credit fund and has a term sheet in six weeks.

Private credit — non-bank lending by funds and specialty finance companies — has become one of the largest pools of capital in private markets, and it now finances things banks structurally cannot. This guide covers who these lenders are, what they lend against, how the structures work, what the process looks like, and when debt is genuinely the right answer.

1. Why This Market Exists

Banks are constrained by capital rules and regulatory expectations that make lending to unprofitable, asset-light companies expensive in balance sheet terms. Their credit boxes are narrow by design.

Private credit funds are not banks. They raise capital from institutional investors seeking yield — pensions, insurers, endowments, sovereign vehicles, family offices — and lend it on terms they set themselves. They can price risk, take collateral banks will not, and move considerably faster.

For a founder, this changes the question. Instead of are we profitable enough to borrow? it becomes what predictable cash flow or pledgeable asset do we have?

2. Who the Lenders Actually Are

• Direct lending funds. The core of the market. Lend to mid-sized companies, historically sponsor-backed, increasingly to venture-backed growth companies. Deal sizes from a few million upward.
• Business development companies (BDCs). Publicly or privately traded vehicles making loans to smaller companies. Because many are listed, their portfolios and terms are visible — useful market intelligence.
• Specialty finance companies. Focused on one asset class: equipment, receivables, inventory, healthcare claims, litigation, royalties.
• Venture debt funds. A distinct segment lending against a company's ability to raise its next round. Covered in detail in our guide to venture debt.
• Revenue-based financing providers, repaying as a percentage of revenue rather than on a fixed schedule — see our comparison with equity funding.
• Credit arms of asset managers and insurers, deploying long-duration capital that suits longer-dated, lower-yielding assets.
• Opportunistic and special situations funds, lending into distress at high prices. Useful when nothing else is available, and expensive.

3. What They Lend Against

The collateral determines everything — pricing, size, covenants, speed.

• Recurring revenue. Contracted subscription revenue supports a facility sized as a multiple of ARR or MRR. Lenders examine retention, contract length, gross margin and concentration. The strongest driver of terms is net revenue retention.
• Receivables. Invoices owed by creditworthy customers, financed at a high advance rate because the risk sits with your customers rather than with you.
• Inventory. Financed at a lower advance rate reflecting liquidation value, not cost.
• Equipment and hard assets. Straightforward, cheap, and secured by something with a resale market.
• Loan books and originated assets. Warehouse facilities for lending businesses — the mechanics are covered in our guide to fintech financing.
• Royalties and contracted future payments. Common in life sciences and media, and increasingly in software with long contracted revenue.
• Enterprise value. Cash-flow lending against the whole business, for companies with real EBITDA. Not available to most venture-stage companies.

4. The Structures

Term loan

A fixed amount, drawn once or in tranches, repaid on a schedule. Usually with an interest-only period followed by amortisation.

Revolving facility

Draw, repay, redraw up to a limit. Excellent for working capital because you pay interest only on what is outstanding, though unused-line fees apply.

Unitranche

Senior and subordinated debt combined into one instrument at a blended rate, from one lender. Simpler and faster than a syndicated structure, and now the dominant form in mid-market direct lending.

Asset-based lending

Sized dynamically by a borrowing base — a formula applied to your eligible assets. This is the mechanic founders most often misunderstand, and it deserves its own section.

Mezzanine and subordinated debt

Sits below senior debt, prices higher, frequently carries warrants or payment-in-kind interest that accrues rather than paying cash.

5. The Borrowing Base — Read This Carefully

A $30 million asset-based facility does not mean $30 million of available cash. It means you can draw up to a formula.

A simplified borrowing base might read: 85% of eligible receivables plus 50% of eligible inventory, less reserves.

Everything turns on the word eligible, and the definition is written by the lender:

• Receivables over 90 days past due are usually excluded entirely
• Concentration limits cap how much any single customer contributes
• Foreign receivables are often excluded or heavily discounted
• Related-party and contra accounts are excluded
• Slow-moving or bespoke inventory may not count
• Lenders hold discretionary reserves they can increase

The consequence is that availability shrinks precisely when the business struggles. Customers pay slower, receivables age past eligibility, inventory sits, and your facility contracts at the moment you need it most. This is structural, not malicious, and it must be modelled before you sign.

6. What the Process Actually Involves

Founders who have only raised equity find credit diligence unfamiliar. It is narrower, more document-driven, and it examines different things — an equity investor is underwriting the upside, a lender is underwriting the downside.

Weeks one to two — screening. The lender wants historical financials, a forward model, the cap table, details of existing debt and liens, and — depending on the structure — an aged receivables listing, a contract schedule or an ARR waterfall. A term sheet follows quickly if the shape works. Getting a term sheet is not a commitment; it is an indication subject to diligence.

Weeks two to six — diligence proper. For asset-based facilities this includes a field examination: a third party physically verifies your receivables, tests collections, checks inventory, and validates the systems producing your reports. Founders consistently underestimate this. It is intrusive, you pay for it, and its findings set your eligibility definitions and reserves — which means it determines how much you can actually borrow.

What they scrutinise most. Customer concentration and credit quality. Dilution history — credit notes, disputes, short payments. Whether your billing system and general ledger reconcile. Contract terms, particularly anti-assignment clauses and termination rights. Your existing lien position. And the reliability of the reporting you will be producing monthly, because the facility depends on it.

Weeks four to ten — documentation. Credit agreements are long and the negotiation is in definitions rather than headline terms. Expect intercreditor arrangements if you have other secured debt, and expect your equity investors' counsel to review the negative covenants.

Closing conditions. Lien searches, security filings, a deposit account control agreement if there is cash dominion, insurance certificates naming the lender, legal opinions, and frequently a solvency certificate. Any of these can add a week.

Then the ongoing burden. Monthly borrowing base certificates, financial statements within a defined window, periodic field exams, and covenant compliance certificates. This is a real operational load and it is the main reason a company taking asset-based debt needs a competent finance function before, not after.

Practical advice: run two or three lenders in parallel to the term sheet stage, then pick one for full diligence — running two field exams simultaneously is expensive and slow. And start twelve weeks before you need the money, because a lender who can see urgency prices it.

7. Pricing and Covenants

Pricing is generally a floating benchmark plus a spread, with the spread reflecting collateral quality and company risk. Asset-backed structures against strong collateral price meaningfully tighter than cash-flow lending to an unprofitable company.

Add to the coupon: arrangement fees, unused-line fees, monitoring or collateral audit fees, prepayment penalties, and in some structures an end-of-term payment or warrants. As with venture debt, the all-in cost is materially above the headline rate.

Covenants are where the real risk sits:

• Financial covenants — minimum liquidity, minimum revenue or ARR, leverage ratios, fixed charge coverage. Measured monthly or quarterly against a plan you supplied.
• Cash dominion. In many asset-based facilities, customer payments flow into a lockbox controlled by the lender. On a trigger, the lender can sweep cash to repay the loan before you see it. This is the single most consequential provision in an ABL and it is frequently skimmed.
• Material adverse change clauses, giving the lender discretion to restrict funding.
• Reporting. Monthly borrowing base certificates, financial statements, sometimes weekly cash flows. A genuine operational burden that usually requires a real finance function.
• Negative covenants restricting further debt, liens, acquisitions, distributions and asset sales.

8. When Debt Is Right — and When It Is Not

The cleanest test: does the borrowed money fund something with a predictable return, or does it fund a hypothesis?

Good uses:

• Financing receivables where the collection timing is known
• Funding inventory for orders already placed
• Buying equipment that generates measurable output
• Funding a loan book that earns a spread
• Extending runway to a specific, credible milestone
• Financing an acquisition whose cash flow services the debt

Bad uses:

• Funding operating losses with no path to changing them
• Marketing spend with unproven payback
• Substituting for equity you cannot raise, which usually means the market is telling you something
• Speculative expansion into an unvalidated market

Equity absorbs failure; debt does not. A failed experiment funded with equity dilutes you. The same experiment funded with debt leaves an obligation that survives the failure and sits ahead of everyone in a liquidation.

9. Negotiating Points That Matter

• Widen the eligibility definitions. This is where the real money is, and it is more negotiable than the rate.
• Cap discretionary reserves, or require notice before they change.
• Narrow the material adverse change clause to objective triggers.
• Negotiate covenant headroom against a realistic plan, not your optimistic one. A covenant set at your base case will be breached.
• Include equity cure rights, letting an investor injection fix a covenant breach.
• Limit cash dominion to genuine default rather than springing on soft triggers.
• Negotiate prepayment, particularly if you may refinance after a round.
• Align maturity with your funding cycle. Debt maturing shortly after your next equity round is a problem for that round's investors.

10. The Investor Side

Private credit is also an asset class allocators buy. LPs are attracted by current income, floating-rate exposure and shorter duration than venture — distributions arrive as interest rather than waiting a decade for an exit, which is a meaningful contrast with the venture fund model.

The considerations for an allocator: how the manager underwrites, what the portfolio holds, how valuations are marked in the absence of a market price, how much leverage the fund itself uses, and how the strategy performed through a genuine credit cycle. Rapid growth in the asset class means many managers have not been tested in a real downturn.

Frequently Asked Questions

How is private credit different from venture debt?

Venture debt lends primarily against your ability to raise the next equity round, and the lender's underwriting is substantially about your investors. Private credit lends against assets and cash flows. Venture debt usually carries warrants; asset-backed private credit usually does not. Different underwriting, different risk, different price.

Do we need to be profitable?

Not for asset-backed structures. Recurring revenue, receivables, inventory and equipment can all be financed by an unprofitable company. Cash-flow lending against enterprise value does require real EBITDA.

Will our equity investors object?

Most support sensible debt because it reduces dilution. They will want to review the covenants, the maturity and the security package, and your financing documents may require consent for debt above a threshold — check your protective provisions before you negotiate, not after.

How long does it take?

Six to twelve weeks from term sheet to funding is typical, with field examinations and collateral audits for asset-based facilities adding time. Start before you need the money — lenders price urgency, and they can see it.

What happens if we breach a covenant?

Usually a negotiation rather than an immediate seizure. Lenders prefer amend-and-extend to enforcement, because they do not want your business. But the amendment has a price — higher rate, tighter terms, fees, sometimes warrants — and it is set by someone who knows you have no alternative. Model your covenants against a downside case before signing.

Can we have private credit and venture debt at the same time?

Yes, though it requires an intercreditor agreement setting out who has priority over what, and both lenders must agree to it before either will close. The common structure separates collateral: an asset-based lender takes the receivables and inventory, a venture debt lender takes everything else. What does not work is signing one facility with a blanket lien and then discovering that no second lender will lend behind it — which is why lien structure should be planned across your whole debt strategy rather than deal by deal.

What does a field examination actually involve?

A third-party examiner spends several days in your business verifying that the assets you are pledging exist and are what you say. They test a sample of receivables against invoices and shipping records, contact some customers to confirm balances, review your dilution history, check inventory counts, and assess whether your systems can produce reliable borrowing base reports. You pay for it, it recurs periodically through the life of the facility, and its findings directly set your advance rates. Prepare for it the way you would prepare for an audit.

How much can we actually borrow against recurring revenue?

It varies substantially with the quality of the revenue rather than the quantity. Lenders size these facilities against a multiple of ARR, and the multiple moves with net revenue retention, contract length, gross margin, churn and customer concentration. A company with long contracted terms, high retention and diversified customers borrows meaningfully more against the same revenue than one with monthly contracts and two customers producing half the revenue. Improving retention before you approach a lender changes the answer more than negotiating does.

What happens to the debt if we get acquired?

It is typically repaid at closing from the proceeds, and the credit agreement will say so — change of control is almost always an event requiring repayment. Check the prepayment penalty, because paying a make-whole on an acquisition is a real cost that comes out of the sellers' proceeds. Occasionally an acquirer assumes the facility, but only if the terms are attractive relative to their own cost of capital, which for a well-capitalised buyer is rare. Factor repayment into your exit waterfall from the start.

The Bottom Line

Private credit has made real debt available to companies banks will not serve. Used against predictable cash flows and pledgeable assets, it is dramatically cheaper than equity and preserves ownership.

Read the eligibility definitions, model the borrowing base in a downturn, prepare properly for the field exam, and never borrow to fund a hypothesis.

Global Capital Network connects founders and allocators with credit investors across our network and events. Get in touch.

This article is general information, not financial or legal advice. Credit documentation is complex and lender-specific. Have counsel and a finance advisor review any facility.