Non-Bank Lenders

Banks and Private Lenders Increasingly Work Together

The line between the two groups is blurring. Banks lend to private credit funds, finance companies and other nondepository financial institutions, and the Federal Reserve's Senior Loan Officer Opinion Survey now asks banks about their standards for those loans. In the same survey, banks that eased terms on business loans have cited more aggressive competition from other banks or nonbanks as a reason.

On individual deals, it is common to see a bank provide the revolving line while a private fund provides the term loan, under an intercreditor agreement that sets out who gets paid from which collateral.

How to Vet a Private Lender

Before signing, ask:

1. Where does your capital come from, and is it committed for the life of my loan?

2. Do you hold the loans you make, or sell them to other investors?

3. How have you handled borrowers that missed a covenant or had a bad year?

4. Who approves amendments, and how long does that usually take?

5. What fees apply at closing, during the loan and at payoff?

6. Can you share references from companies you have lent to?

A lender that holds its loans and has worked through downturns is usually easier to deal with when something goes wrong.

Frequently Asked Questions

Are non-bank lenders regulated?
Yes, but differently from banks. They are not supervised as banks are, yet depending on the lender and product they may be subject to state licensing, securities rules and other federal and state laws.

Are private lenders safe to borrow from?
Many are large, established institutions. Quality varies, though, so check track record, references and the full contract before committing.

Can I use a bank and a private lender at the same time?
Yes. Split structures are common, but both lenders will need to agree on collateral and payment priority in an intercreditor agreement.

Find the Right Lender for Your Business

Banks and non-bank lenders each have a place, and the best choice depends on your company's size, cash flow, collateral and timeline. Compare offers on total cost and terms, then explore the financing options that match where your business is today.

Non-bank lenders are companies and funds that make business loans without holding a bank charter or taking customer deposits. They include private credit funds, business development companies, commercial finance companies, factoring and equipment finance firms, and online lenders, and together they now compete with banks for many of the same borrowers.

For a business owner, the practical question is not which type is better in general, but which source fits a specific need. These lenders often say yes when a bank says no, or offer more money on a looser structure, but the trade-offs in cost and terms are real.

How They Differ From Banks

The main differences come down to where the money comes from and who oversees the lender.

• Funding. Banks lend out insured deposits. Lenders outside the banking system raise capital from investors, insurance companies, pension funds and their own credit lines, and some sell or securitize the loans they make.

• Oversight. Banks are examined by federal and state banking regulators and face capital rules that limit riskier loans. Lenders without a charter are not supervised in the same way, though state licensing laws, securities laws and other rules can still apply depending on the lender and product.

• Risk appetite. Freed from bank capital rules, many private lenders will accept higher leverage, thinner collateral or industries that banks avoid.

• Relationship scope. Banks want deposits, treasury services and other business. Most private lenders simply want a well-structured loan.

Types of Non-Bank Lenders

• Direct lending and private credit funds. Pools of investor capital that make senior, single-loan and junior loans to mid-sized companies, often in acquisitions.

• Business development companies. Closed-end investment companies regulated under the Investment Company Act of 1940 that lend to and invest in smaller private companies. Some are publicly traded.

• Small Business Investment Companies. Privately owned funds licensed and regulated by the U.S. Small Business Administration that provide long-term debt and equity to small businesses.

• Commercial finance companies. Lenders focused on asset-based lines, equipment loans, leases and specialty products.

• Factors. Firms that buy or advance against accounts receivable.

• Insurance companies. Long-term lenders that buy privately placed notes from larger, stable companies.

• Online lenders. Technology-driven providers of smaller, faster loans and advances, mainly to small businesses.

• Community development lenders. Mission-driven lenders that serve underserved communities and businesses.

Why Borrowers Choose Them

• More capacity. A private lender may offer a larger loan relative to earnings than a bank is comfortable with.

• Speed and certainty. One decision maker and a smaller credit committee can mean a faster commitment.

• Flexible structure. Interest-only periods, delayed draws, fewer covenants or covenants set with wider cushions.

• No deposit requirement. The company can keep its operating accounts wherever it likes.

• Fit for unusual situations. Turnarounds, rapid growth, recent losses or complex ownership.

Take a hypothetical company with $5 million of EBITDA. A bank might cap its loan at $12.5 million, or 2.5 times earnings, while a private fund offers $20 million, or 4.0 times, at a higher rate. The extra $7.5 million could fund an acquisition without new equity, but it also brings larger interest payments and less cushion if earnings dip.

The Trade-Offs

Private capital costs more because its investors expect higher returns. Beyond the rate, expect higher upfront fees, prepayment premiums in the early years, tighter default provisions and sometimes a requirement to share more detailed reporting. Most private lenders do not offer cash management, payroll or merchant services, so many companies keep a bank relationship alongside.

Smaller online lenders can be very expensive and may use daily or weekly debits. Read every agreement carefully and compare the total amount repaid, not just the quoted rate.