Private Credit for Mid-Market Businesses: How Debt Funds Lend, What They Charge, and What to Watch

Private credit has become one of the fastest-growing parts of Australian business lending. Debt funds now finance property developments, acquisitions, growth capital and refinances that banks have stepped back from. For a mid-market business, that means more options, and more need to understand who you're dealing with.

What Private Credit Is

Private credit is lending by investment funds rather than banks. The money comes from super funds, insurers, family offices, wealthy individuals and international investment managers, who invest in a fund that lends directly to businesses. The fund earns the interest and fees, and passes most of it on to its investors.

Because the lender isn't a bank, it isn't bound by APRA's capital rules. It can lend at higher gearing, against assets banks discount heavily, or on structures banks won't offer. In return, it charges more, and its terms can be stricter when things go wrong.

The RBA estimated the Australian private credit market at around $40 billion in late 2024, about 2½% of total business debt, and growing quickly. It has noted that private credit borrowers tend to be more highly geared than bank borrowers, and that the sector hasn't yet been tested by a major downturn.

Where Private Credit Fits

• Property development. The largest single use in Australia. Funds lend on construction, land and residual stock, often at higher loan-to-value or loan-to-cost ratios than banks, or where pre-sales are below bank requirements.
• Acquisition and leveraged finance. Funding business purchases at higher multiples of EBITDA than banks are comfortable with, sometimes as a single "unitranche" loan instead of senior debt plus mezzanine.
• Growth capital. For businesses growing faster than their balance sheet, where a bank wants more history.
• Special situations. Refinancing a business through a turnaround, a covenant breach or an ATO problem, while the long-term solution is put in place.
• Second-ranking and mezzanine debt. Sitting behind a bank loan to fill the gap between bank debt and equity.

How Private Credit Is Priced

Private credit is generally priced well above bank lending, reflecting the higher funding cost of fund money and the extra risk taken. The all-in cost is usually made up of:

• Interest rate or margin. Either a fixed rate or a margin over BBSW or BBSY. Higher-risk positions, such as mezzanine debt or high-LVR construction, carry much higher rates than first-ranking senior debt.
• Establishment fee. Usually a percentage of the facility limit, paid at settlement.
• Line or commitment fees. On undrawn limits, common in construction facilities.
• Exit or repayment fees. A fee on repayment, or a minimum amount of interest the fund must earn even if you repay early.
• Default rates. A higher rate that applies if you breach the loan terms. These can be several percentage points above the normal rate.

Compare private credit offers on total cost over the expected life of the loan, including establishment, exit and minimum-interest terms, not just the headline rate. Two offers with the same rate can differ by several percentage points of total cost.

How Private Credit Funds Assess a Deal

• The asset or cash flow. For property, the valuation, feasibility and the builder. For businesses, the strength of earnings and cash conversion.
• The exit. Private credit is usually short to medium term, often one to three years. The fund will focus hard on how it gets repaid: sale of stock, refinance to a bank, or sale of the business.
• The sponsor. Your track record, the equity you're contributing, and how you've handled problems in the past.
• Control and reporting. Funds usually want more frequent reporting and tighter covenants than a bank, so they see problems early.

What to Watch

• Default and enforcement terms. Funds can act faster than banks when a covenant is breached. Understand what counts as a default, and how much time you'd have to fix it.
• Minimum interest and exit fees. These can make an early refinance far more expensive than you expect.
• Who you're really dealing with. ASIC's 2025 review of private credit funds found good practice at many managers, but also inconsistent practices and some material deficiencies, including unclear reporting, inconsistent use of terms such as "senior debt", and conflicts of interest in how fees are shared. Those findings were about protecting fund investors, but they matter to borrowers too. A well-run fund with stable investors is a more reliable lender through a difficult period.
• Funding certainty. For construction and staged drawdowns, check that the fund has committed capital to cover the full facility, not just the first draw.
• Borrower-paid fees. Ask whether any fees you pay go to the fund manager rather than the fund, and whether the manager is earning fees on both sides.

Questions to Ask a Private Credit Lender

• How is the fund funded, and is capital committed for my full facility?
• What is the total cost, including establishment, line, exit and minimum-interest terms?
• What happens if I want to refinance after 12 months?
• What are the default events, cure periods and default rate?
• How many similar loans has the fund done, and how has it handled loans that ran into trouble?

How We Help

We know the private credit lenders active in the Australian mid-market, including how they behave when a deal runs late or over budget. We take your deal to several funds at once, compare the total cost and the terms that matter most, and plan the exit, usually a move to bank funding, from day one. Learn more about our private credit service, mid-market commercial finance, and bank vs non-bank lenders.

Book a free, no-obligation consultation and we'll show you how your deal would look to private credit and to the banks.