Private Credit vs Traditional Bank Financing: Is Private Credit Right for your Business?
As the Asia-Pacific private credit market surges toward a projected US$92 billion by 2027, including growth driven by regulatory initiatives such as Singapore’s US$1 billion Private Credit Growth Fund (managed by Apollo Global Management), private credit has emerged as a legitimate mainstream alternative to traditional bank financing.
For corporate borrowers in Singapore, the choice between private credit and traditional bank financing depends on the commercial trade-offs. A clear understanding of the key differences helps companies assess financing options that align with their operational needs and flexibility.
What is Private Credit?
Private credit refers to loans provided by non-bank lenders, such as private funds, asset managers, and institutional investors, directly to companies through privately negotiated agreements. Unlike traditional bank loans or syndicated public bonds, these are bespoke: tailored terms, pricing and documentation reflect individual borrower profiles and risk appetites.
Certain companies and market segments face inherent challenges in securing traditional bank credit, such as high-growth, negative EBITDA companies and asset-light businesses with primarily intangible assets, such as intellectual property. Private credit arrangements have emerged as an alternative to fill the gap in these "bank-constrained" segments.
Considerations – Potential Differences
When evaluating financing options, companies may wish to consider several factors that extend beyond the headline interest rate.
1. Covenant Structure and Operational Freedom
Traditional bank loans have relied on maintenance covenants (periodic financial tests of ratios such as leverage or interest coverage) and sometimes incurrence covenants, which restrict specific actions like taking on new debt. For private credit agreements however, it has become commonplace to adopt covenant‑lite structures, which, for example, set thresholds only for major events or relax ongoing tests, granting borrowers some performance leeway.
For companies with volatile quarterly performance, negotiated covenants can provide crucial operational flexibility. However, careful legal drafting is essential to ensure that reporting triggers, information rights, and default provisions do not undermine the intended flexibility.
2. Refinancing and Exit Optionality
Private credit agreements may include provisions such as call protections that restrict borrowers from pre-paying the loan facility without paying a fee or premium designed to compensate the lender for the interest income it expected to earn over the intended life of the facility. Such protections are commonly negotiated in direct lending documentation to protect lenders’ anticipated returns in bespoke transactions.
While banks may include prepayment provisions, they do not routinely impose bespoke call protection and, in many cases, permit prepayment without a significant premium after an initial period. On the other hand, traditional bank facilities generally permit prepayment at or near par after a short initial period. As a result, borrowers may consider that bank facilities are often easier to refinance, replace, or restructure compared with bespoke private credit arrangements, which are structured to protect a lender’s expected yield over a longer holding period.
Companies expecting to refinance, divest or recapitalise within a short horizon should therefore consider not only the covenant structure but also how prepayment mechanics and refinancing flexibility differ between private credit and traditional bank facilities.
3. Speed
Another consideration for growth-oriented or time-sensitive transactions is the execution timeline. Private credit agreements can offer streamlined approval processes and bilateral decision-making, which can accelerate transaction timelines compared to traditional bank facilities that may involve multiple approval layers or credit committees, which may limit the scope for bespoke restructuring solutions tailored to individual borrower circumstances.
This is particularly valuable for time-sensitive acquisitions, refinancings, or situations where non-standard borrower profiles would require extended due diligence from traditional lenders.
4. Relationship Dynamics and Distress Management
Lastly, private credit agreements may offer greater flexibility during periods of financial stress for the borrower – as private credit lenders typically hold loans until maturity, there is often greater incentive for private credit lenders to devise workable solutions and renegotiate terms with the borrower, as compared to traditional bank loans, which may which typically involve more formalised workout processes.
Conclusion
Private credit is often advantageous when covenant flexibility, execution speed, or access for non-traditional business models outweigh the higher costs and prepayment constraints. The decision would generally on whether the company's strategic objectives demand the certainty and structural flexibility that private credit can provide.
Companies benefit from careful legal and commercial guidance when evaluating these trade-offs and negotiating private credit terms. If you would like to have a chat to discuss a private credit agreement for your business, please do not hesitate to get in touch.