Private Credit in Canada: What Owner-Managed Businesses Should Know

The short answer: private credit is lending by non-bank institutions, and over the past few years it has become a genuine third option for Canadian businesses that sit between what a chartered bank will underwrite and what an equity sale would cost. It is more expensive than bank debt and considerably cheaper than selling equity. Whether it is the right instrument depends less on the rate than on what the business is trying to accomplish.

What private credit actually is

Private credit means loans made by funds, institutional lenders, and specialty finance firms rather than by deposit-taking banks. The lender raises capital from pension funds, insurers, family offices, and high net worth investors, then deploys it into negotiated, privately held loans. There is no public market for the paper and no rating agency involved. The terms are set between two parties across a table.

The category grew out of a structural change in bank lending. Post-crisis capital rules made it expensive for banks to hold loans that do not fit standard credit boxes. Businesses whose cash flow is lumpy, whose assets are intangible, whose leverage sits above conventional thresholds, or who need to move faster than a bank credit committee can meet, found themselves without a lender. Private credit funds stepped into exactly that gap.

In Canada the market has matured considerably. What was once a handful of specialty lenders is now a deep field spanning senior secured funds, unitranche providers, mezzanine and subordinated debt funds, asset-based lenders, and mortgage investment corporations serving real estate borrowers. The practical consequence for a founder-led company in BC or Alberta is that a bank declining an ask is no longer the end of the conversation.

How it differs from bank debt

Price. Private credit costs more, and sometimes materially more. A borrower is paying for speed, flexibility, and a lender who will underwrite a story the bank will not. Pricing on senior private credit typically sits above bank pricing, and subordinated or unitranche structures sit higher again because the lender is taking more risk in the capital stack.

Covenants. Private lenders often run looser covenant packages, or fewer covenants, than a bank would demand at comparable leverage. That is not generosity. It reflects a different underwriting philosophy, one that leans more on enterprise value and cash flow durability than on balance sheet ratios tested quarterly. Our note on loan covenants explained sets out what those tests actually measure.

Speed and certainty. A private credit fund can commit in weeks where a bank syndication takes months. For an acquisition on a deadline, or a refinancing against a maturity, that difference is often worth more than the rate spread.

Leverage tolerance. Private lenders will generally advance against a higher multiple of EBITDA than a chartered bank. That is the single most common reason a business ends up in this market: the bank was willing to lend, just not enough.

Relationship. A bank relationship comes bundled with operating accounts, cash management, and a branch. Private credit is a financing relationship and little else. Many borrowers run both, using bank facilities for working capital and private credit for the term piece.

Where it fits in the capital stack

Private credit is not one instrument. It spans several positions, and the label obscures real differences.

Senior secured private credit sits in first position against the assets, much as a bank term loan would, but with a non-bank lender and a more accommodating structure. Unitranche blends senior and subordinated into a single facility at a single blended rate, which simplifies the intercreditor problem and speeds execution. Subordinated and mezzanine debt sit behind senior lenders, cost more, and sometimes carry warrants or a payment-in-kind component. We cover the distinction in our note on senior debt versus subordinated debt.

Asset-based lending advances against receivables, inventory, and equipment rather than against cash flow, which suits businesses with strong collateral and volatile earnings. Mortgage investment corporations serve commercial real estate borrowers who need faster execution or higher loan-to-value than a bank or credit union will provide.

When it makes sense

Acquisition financing. A private company buying a competitor often needs more leverage than a bank will extend against the combined entity, particularly where the target carries intangible value. Private credit fills the gap between bank senior debt and the equity cheque. See our note on how to finance a business acquisition in Canada.

Shareholder buyouts and management transitions. When one shareholder exits and the remaining group buys the shares, the company frequently needs debt against its own balance sheet to fund the purchase. Banks are cautious here because the proceeds leave the business. Private lenders underwrite these regularly. Our note on management buyouts in Canada covers the structure.

Recapitalizations and partial liquidity. An owner who wants to take money off the table without selling the company can borrow against it. This is a common alternative to a full sale, and we set out the trade-offs in our note on when to consider a recapitalization instead of a full sale.

Growth capital where equity is too expensive. A profitable business funding an expansion faces a choice between selling shares and borrowing. If the business is growing and the owner believes the equity is worth more later, debt at a high rate can still be cheaper than dilution. Our note on whether to sell or raise capital works through that comparison.

Refinancing a facility the bank will not renew. Businesses coming off a covenant breach, a loss year, or a change in the bank’s sector appetite often need a bridge. Private credit provides time to fix the underlying issue and return to bank pricing later.

When it does not make sense

Private credit is expensive capital, and expensive capital punishes businesses that cannot service it. A company with thin or unpredictable margins that takes on private credit at a high coupon has bought time, not a solution.

It is also the wrong answer for a business that qualifies for bank debt and simply has not asked properly. A significant number of owners assume they will be declined and never test it. Presenting a business well to a bank, with clean normalized financials and a coherent forecast, changes outcomes more often than owners expect. Our note on what lenders look for sets out what actually gets underwritten.

And it is the wrong answer where the real problem is structural. A business losing money because of pricing, customer concentration, or an obsolete cost base does not need financing. It needs the underlying issue addressed first.

What lenders look at before they commit

Private credit underwriting is narrative-driven in a way bank underwriting is not. A bank tests the business against a credit box. A private lender is trying to decide whether it believes the story, and it will spend real time on the things that determine whether the loan gets repaid.

Quality and durability of cash flow. Normalized EBITDA matters more than reported EBITDA, and lenders will interrogate every add-back. Recurring or contracted revenue supports more leverage than project revenue. A business whose earnings swing hard with a commodity price or a single construction cycle will be sized conservatively regardless of the headline number.

Customer and supplier concentration. A borrower where one customer represents a large share of revenue is one contract loss away from a covenant breach. Lenders price that risk explicitly. We set out the mechanics in our note on customer concentration and business value.

Management depth and the owner question. If the business depends entirely on one person, the lender is underwriting that person rather than the company. Succession planning, a real management team, and documented processes all expand capacity.

Collateral and the downside case. Every lender models what recovery looks like if the plan does not work. Real property, equipment with resale value, and collectible receivables all improve terms. Businesses whose value is concentrated in goodwill and relationships find pricing tighter and covenants firmer.

How these deals get done

Private credit lenders are not interchangeable. Each fund has a mandate covering sector, cheque size, leverage tolerance, geography, and position in the stack. A borrower who approaches the wrong fund gets declined for reasons that have nothing to do with the quality of the business.

The process runs on a properly prepared information package: normalized historical financials, a forecast a lender can interrogate, an explanation of the use of proceeds, and a clear view of the security available. Lenders then issue term sheets, which are compared not only on rate but on amortization, prepayment penalties, covenant package, fees, warrants, and control rights on default.

Running more than one lender in parallel is what creates competitive tension, and competitive tension is what moves terms. A single term sheet is a price. Three term sheets are a negotiation. Our debt and capital advisory practice runs these processes for owner-managed borrowers across BC and Alberta.

Frequently asked questions

What does private credit cost compared to a bank loan?
More, and how much more depends on where the facility sits in the capital stack. Senior private credit prices above bank debt but below subordinated debt. Unitranche blends the two. Mezzanine and subordinated facilities price highest and sometimes include warrants or payment-in-kind interest. The right comparison is not private credit versus bank debt, but private credit versus the cost of the equity you would otherwise sell.

Is private credit only for companies in trouble?
No. That is a persistent misconception. A large share of private credit in Canada funds acquisitions, shareholder buyouts, and growth for profitable, well-run companies that simply need more leverage or faster execution than a chartered bank provides. Distressed situations are a segment of the market, not the market.

How much can a business borrow in the private credit market?
It depends on cash flow, asset base, sector, and position in the stack. Private lenders will generally advance against a higher multiple of normalized EBITDA than a bank, and asset-based lenders size against receivables, inventory, and equipment instead. Capacity is set during a proper financing analysis rather than by a rule of thumb.

How long does a private credit financing take?
A prepared borrower with clean financials can usually move from launch to funding in six to ten weeks. Unprepared borrowers take longer because diligence surfaces issues that should have been resolved first. The speed advantage over bank syndication is real, but it depends on the borrower being ready.

Do I need an advisor to access private credit lenders?
Not strictly, but the market is fragmented and mandate-driven. Knowing which funds will look at your sector, size, and structure, and running several in parallel to create tension, is where an advisor earns the fee. Approaching one lender and accepting its term sheet is how borrowers overpay.

Next steps

If you are evaluating an acquisition, a shareholder buyout, a recapitalization, or a refinancing and want to understand what the private credit market would offer, we can run that analysis. Review our debt and capital advisory services, or contact us directly for a confidential, no-obligation conversation.