For most of the last decade, a lower middle market company looking for a new facility had two broad places to go. It could go to a bank, usually the one it already holds its operating accounts with, or it could go to a private credit fund, a non-bank lender that raises money from institutional investors and lends it directly to companies. Both lend against cash flow, both write term loans and revolving facilities, and both will tell you they are flexible. The differences show up in the price, the amount, the covenants and how the lender behaves when something goes wrong.
Neither is better in the abstract. The right answer depends on what the money is for, how much of it you need relative to earnings and how much certainty you need on timing.
Where the two differ
Cost
Banks fund themselves largely with deposits, which is cheap money, and they price to win the wider relationship: your operating accounts, treasury services and card programs. A bank term loan to a healthy company is usually the lowest-cost senior debt available.
Private credit funds pay their investors a return well above deposit rates, and they price accordingly. In September 2026, KBRA DLD reported average spreads on lower middle market leveraged buyout loans of SOFR plus 528 basis points, a two-year high. Valuation Research Corporation's third-quarter matrix showed unitranche coupons in a range of SOFR plus 500 to 575. Add a base rate that, after the Federal Reserve's September increase, sits around four percent, and the all-in cost of private credit is meaningfully higher than a comparable bank loan. Funds also tend to charge an upfront discount on the loan and protect themselves with prepayment premiums in the first year or two.
How much they will lend
This is where private credit earns its price. Banks are constrained by capital rules and internal policy on how much leverage they will hold, and many will not go much beyond three times EBITDA for senior cash-flow debt in the lower middle market, less in cyclical sectors. Private credit funds will often lend more against the same earnings, particularly where the business has recurring revenue or a sponsor behind it. If the financing only works at a higher multiple, the bank conversation may simply be shorter.
Covenants and reporting
Both bank and private credit loans in the lower middle market usually carry maintenance covenants: tests of leverage, interest or fixed charge coverage measured every quarter whether or not you are borrowing more. Banks tend to set tighter levels but are often more relaxed about the reporting package for smaller borrowers. Private credit funds may allow more headroom but ask for monthly financials, regular lender calls and more detailed information rights. Read both carefully. The covenant set is what decides how the facility feels in a weak quarter.
Amortization
Bank term loans usually amortize, often over five to seven years, which reduces leverage steadily but takes cash out of the business every quarter. Private credit term loans more often carry light amortization, one percent a year is common in sponsor deals, with most of the principal due at maturity. That leaves more cash for growth or acquisitions, at the price of a larger refinancing at the end.
Speed and certainty
A private credit fund is a single decision-maker with its own credit committee, and it can often deliver a commitment within a few weeks of receiving a complete package. Banks can move quickly for existing clients on straightforward requests, but a larger or more unusual facility may need several layers of approval. When a purchase agreement or a maturity date sets the timetable, that certainty has real value.
When things go wrong
A bank with a long relationship and other business with you has reasons to work through a difficult year. It also has regulators watching its problem loans, and a credit that drifts can move to a workout team. A private credit fund that holds the whole loan can make decisions quickly and may be more willing to agree a waiver or an amendment for a fee, because it knows the business well and wants to protect its position. Either can be a good partner under stress. The quality of the individual lender matters more than the label.
What the market looks like now
Bank appetite has been steady. The Federal Reserve's July 2026 Senior Loan Officer Opinion Survey found standards for commercial and industrial loans basically unchanged on net for firms of all sizes, with banks narrowing loan spreads for both larger and smaller borrowers. Demand from larger and middle market firms strengthened, while demand from small firms was roughly flat.
Direct lending volumes, meanwhile, have slowed. KBRA DLD put third-quarter 2026 direct lending volume at 38.9 billion dollars, the lowest quarterly total since the second quarter of 2023. Slower volume usually means more competition between funds for each good credit, which can work in a borrower's favor on terms even when headline spreads are higher.
How to decide which to approach
A few questions narrow the choice quickly:
- What leverage does the financing need? If the amount fits comfortably within what a bank will lend against your earnings, start with banks. If it does not, private credit is likely the only route to the full amount.
- How much does cost matter against flexibility? A company refinancing stable debt should usually take the cheapest money. A company funding an acquisition or a growth plan may get more value from light amortization and covenant headroom.
- Is there a hard date? If a closing or a maturity cannot move, weigh certainty of execution heavily.
- What else do you need from the lender? Treasury services, letters of credit and foreign exchange point toward a bank. A delayed-draw facility for a series of acquisitions often points toward a fund.
- Could both work together? Many lower middle market structures combine a bank revolving facility for working capital with a private credit term loan, or a bank-led senior loan with a smaller subordinated piece from a fund.
The practical answer is often to ask both. A short, competitive process that puts the same credit package in front of a few banks and a few funds shows you the real trade-off between price and flexibility for your business, rather than the one either side describes in general.
Kenward Partners runs that process for lower middle market companies, preparing the credit package once and taking it to the banks and private credit funds most likely to fund it, so you can compare the terms side by side before you choose.
Sources: KBRA DLD, October 2026; Valuation Research Corporation, Q3 2026; Federal Reserve, July 2026 Senior Loan Officer Opinion Survey; Federal Reserve, 16 September 2026.
