The Capital You’re Not Using

Posted on March 25, 2026

by Noel Guilford

Private credit, hidden cash, and the funding decision most business owners get wrong.

Your bank turned you down.

Or perhaps it didn’t turn you down exactly — it just made the process so slow and painful that you gave up. Either way, you need capital. You’ve got an acquisition in your sights, or a piece of equipment that would transform your capacity, or a contract that requires upfront investment you can’t fund from cash flow.

So you start Googling. And somewhere in the results, you stumble across something called “private credit.”

It sounds interesting. Fast execution. Flexible terms. No listing requirements. A bespoke deal negotiated directly with a lender who actually understands your business.

Before you go any further, stop.

Because the most important funding question isn’t which lender to approach. It’s whether you need external capital at all.

• • •

What Is Private Credit?

Private credit is corporate lending provided by non-bank institutions — specialist funds, asset managers, private equity firms, insurers — through loans that are not traded on public markets. The deals are typically negotiated directly between lender and borrower, often for mid-market or PE-backed companies, with floating-rate interest and covenant-heavy structures.

Think of it as the lending market that grew up in the gap left when banks retreated. After the 2008 financial crisis, regulation forced banks to hold more capital against riskier loans. They became more cautious with mid-market businesses. Private credit stepped in.

The result is a global market now estimated in the low trillions of dollars. It’s dominated by large alternative asset managers — names like Blackstone, Apollo, and KKR — but there’s a long tail of specialist firms operating in the UK and European mid-market. ICG in London, Cheyne Capital, AXA IM Alts, and hundreds of smaller dedicated managers.

Ticket sizes typically range from around £10m upwards, though larger multi-billion facilities are emerging. For the typical UK owner-managed business turning over £250k to £2m, a direct private credit facility is unlikely. But the market is growing fast, blended-rate products are appearing at smaller scales, and the structural shift matters even if you never borrow from a private credit fund directly.

Why? Because it tells you something about the world your business operates in. Banks are less willing to lend into the mid-market. Alternative capital is more expensive. And the cost of getting your funding decision wrong has gone up.

• • •

Why Has Private Credit Taken Off?

Five forces are driving the growth.

Bank retrenchment. Post-crisis regulation reduced banks’ appetite for leveraged and mid-market corporate lending. The funding gap that created has never fully closed.

Investor demand for yield. Pension funds, insurers, and family offices want higher returns than public bonds offer. Private credit delivers floating-rate income with reasonable collateral protection.

Higher interest rates. Floating-rate private loans have become more attractive in a higher-rate environment. Income goes up when rates go up — the opposite of traditional bonds.

Borrower preferences. Speed, certainty of execution, confidentiality, and tailored terms. A private credit deal can close faster than a syndicated bank loan, with fewer committees and less paperwork.

Market disruption. COVID-19 and the 2023 US regional banking turmoil accelerated the shift further. When banks freeze, private credit lenders keep writing cheques.

For UK SMEs specifically, private credit lending is estimated at around £100bn. It’s filling gaps left by banks that have become cautious about hospitality, retail, and other sectors they once served enthusiastically.

• • •

The Risks You Won’t See in the Brochure

Private credit is marketed on its benefits: flexibility, speed, bespoke terms. The risks get less airtime. Here are the ones that matter.

Floating-rate exposure. Most private credit facilities charge base rate plus a margin — often 5–7% above base. If your facility is at base plus 5% and rates move against you, the cash flow impact compounds quickly. A business that modelled repayments at one rate can find itself seriously stretched at another. You need to stress-test at least three rate scenarios before signing anything.

Blended cost of capital. All in, private credit facilities typically cost 8–12%. Compare that with a standard commercial mortgage or asset finance deal. The premium buys speed and flexibility — but you need to be certain the return on whatever you’re funding exceeds that cost by a comfortable margin.

Covenant obligations. Private credit historically relied on strong covenants. These are conditions you must meet — minimum EBITDA levels, debt-to-equity ratios, reporting requirements. Breach a covenant and the lender can call the loan or impose punitive terms. Ironically, competition among lenders is now eroding covenant quality, which sounds good for borrowers in the short term but means lenders will be less patient in a downturn. Easy to enter, brutal to exit.

PIK interest. Some structures use payment-in-kind interest, where unpaid interest is added to the loan balance rather than paid in cash. This reduces your monthly outgoings but compounds your debt. It’s leverage on top of leverage. If performance weakens, PIK interest can turn a manageable facility into an unmanageable one very quickly.

Opacity. Private loans are not publicly traded. Pricing and portfolio risks are harder to assess. This matters less for the borrower than for the system — regulators and the Bank of England are watching this space carefully — but it also means the terms you’re offered may be harder to benchmark against alternatives.

Interconnectedness. Private credit funds increasingly rely on bank financing themselves. A shock in one part of the system can spill over. This is a systemic risk, not a borrower risk, but it means the “private credit is separate from banking” narrative is less true than it was five years ago.

• • •

The Question Before the Question

Here’s where I part company with most commentary on this topic.

The question is not “should I use private credit or a bank loan?”

The question is: what is the cheapest form of capital you already have access to and aren’t using?

For most owner-managed businesses turning over £250k to £2m, the answer is not external debt of any kind. It’s one or more of these:

Retained profit. If your margins are healthy but your cash position is weak, the problem is usually extraction — too much leaving the business, too soon, in the wrong form. Before borrowing, look at whether your dividend and drawings policy is sustainable. Retained profit is free capital.

Better debtor collection. If your average debtor days are 45 and you could get them to 35, run the maths. On £1m turnover, reducing debtor days by 10 releases roughly £27,000 in cash. That’s not a one-off saving — it’s a permanent improvement to your working capital position. No interest. No covenants. No lender.

Restructured pricing. A 2% increase in gross margin on £1m turnover is £20,000 a year — every year. Compounded over three years, that’s £60,000 in additional profit that could fund your growth without any external capital at all.

Deposit or milestone-based billing. If you’re funding large projects from your own cash flow and invoicing on completion, you’re effectively lending your clients money interest-free. Restructure your billing terms to collect deposits upfront and bill at milestones. Your clients’ working capital improves your cash position.

Improving the cash conversion cycle by even 10 days might eliminate the need for external funding entirely.

That’s not a guess. It’s arithmetic. And it’s the kind of arithmetic that should happen before anyone starts talking to lenders.

• • •

When External Capital Is the Right Answer

I’m not arguing that borrowing is always wrong. I’m arguing that it should be a deliberate, well-modelled decision — not a reaction to a cash squeeze you haven’t properly diagnosed.

External capital makes sense when:

The return on investment clearly exceeds the cost of capital. If you’re acquiring a competitor at 4x EBITDA and the blended cost of your facility is 10%, you can model whether the deal creates value. If the maths doesn’t work on a spreadsheet, it won’t work in reality.

The opportunity is time-sensitive and internal capital is insufficient. Speed of execution is private credit’s genuine advantage. If a competitor comes to market and you need to move within weeks, a private credit facility can close faster than a bank syndication. But “fast” is not a strategy. It’s a tactic. The strategy should already be in place.

You’ve already optimised your internal capital. If your debtor days are already tight, your margins are strong, your extraction is disciplined, and you still need capital for growth — then yes, it’s time to look outside. But only then.

• • •

What Your Adviser Should Be Doing

A good business adviser won’t hand you a loan comparison table. They’ll challenge whether you need the loan at all.

Before any funding conversation, the work should already be done. Your margins should be understood by product, service, and customer. Your cash conversion cycle should be mapped. Your pricing should have been stress-tested. Your drawings policy should be explicit, not accidental.

That’s the boring work. It’s also the work that saves you the most money.

If, after all of that, external capital is genuinely the right answer, your adviser should be helping you model the scenarios. What happens to your cash flow if rates rise by 1%? By 2%? What are the covenant triggers and how close are you to them in a downside case? What’s the exit strategy — refinance, repay from cash flow, or sell?

These are not questions you want to answer after you’ve signed. They’re questions you want to answer before you pick up the phone.

• • •

The Real Point

Private credit is interesting. It’s a genuine structural shift in how mid-market businesses access capital. Every business owner should understand what it is and why it exists.

But understanding it is not the same as needing it.

The most powerful funding source most owner-managed businesses have is the cash they’re already generating — and leaking. Retained profit. Faster collection. Better pricing. Smarter billing.

None of that requires a lender. None of it carries covenants. None of it compounds at 10%.