Bank or private credit. Which fits your business?
Neither category is better in the abstract, and the investor-page framing that pits a bank against a debt fund at £10m to £250m answers a different question than yours. For a business raising £3m to £15m the real choice runs across a few categories of lender, each priced for something different. A clearing bank lends the cheapest money in the market and is conservative on quantum by design, so a clean, profitable, sensibly geared business that fits its credit policy will almost always be cheapest with a bank. A private-credit fund lends dearer capital raised from pension funds and insurers, but it will stretch further on leverage, move faster and test fewer covenants, so a borrower who needs more debt than a bank will extend, or a committed answer against a hard deadline, is buying something the bank cannot supply. Challenger and specialist banks sit between the two, and asset-based lenders price off the balance sheet rather than the earnings. This guide sets out how the categories differ on cost, leverage, speed, covenants and security, and which one fits which plan, at August 2026 rates.
Written for the borrower’s side of the table. This is general guidance, not advice on your specific facility. It deepens the shorter answers in our working guide.
Deposit-funded banks against capital raised from institutions.
A bank lends depositors’ money under prudential regulation and is conservative on quantum by design; a private-credit fund lends capital raised from pension funds and insurers and will stretch further for a return. That single distinction sits behind every difference on this page. A clearing bank is deposit-funded and PRA-authorised, prices at a low margin over SONIA, underwrites against a standardised credit policy, and holds its own position, so its offer is largely its offer and its quantum is capped by its risk appetite rather than by the earnings. It is the cheapest capital a qualifying business can raise.
A private-credit fund, the direct-lending category that provides unitranche and similar structures, raises committed capital from institutions rather than taking deposits. It has no branch network and no deposit base to protect, underwrites on forward cash flow and the business plan, and holds the whole ticket itself, so it can give a deliverable answer quickly and take a single position a bank would want to share. It charges more for that money and for the flexibility that comes with it. Between the two categories sit challenger and specialist banks, still banks and still deposit or wholesale funded, but built to underwrite a story the high street declines, often at a keener price than a fund would quote for the same risk.
A fourth category prices off the balance sheet rather than the earnings. An asset-based lender advances against a borrowing base, commonly the debtor book and sometimes stock and plant, so its quantum tracks the assets rather than a leverage multiple, as our guide to asset-based lending sets out. The categories are points on a spectrum, not two rival camps, and the borrower’s task is to find the point on it that finances the plan most cheaply.
A bank is cheapest on a clean secured deal; a fund is priced for leverage and speed.
A bank wins the cost comparison whenever the business fits its credit policy, and a fund only earns its higher price when it funds something the bank cannot. Both categories lend floating-rate, priced over SONIA, which sat at 3.73% on 2 July 2026 against a Bank Rate of 3.75%, held at the Bank of England’s June meeting. Bank of England, Bank Rate. So the comparison is a comparison of margins and fees on top of the same reference. On a secured, sensibly geared deal a bank margin is a low single-digit spread over that reference, an all-in cost near 6.75% on a three-point margin, a point or two keener on the strongest credits and more as risk rises.
A private-credit fund prices materially higher. In the UK mid-market at 2026 rates, unitranche is broadly SONIA plus 550 to 800 basis points, which at July-2026 SONIA is an all-in coupon of roughly 9.25% to 11.75% before fees, depending on leverage, sector and quality. Deloitte Private Debt Deal Tracker. The margin is only the start. On top sits an arrangement fee paid on day one, nearer 1% of the facility on a bank deal and commonly higher on a fund deal, and on a fund an original issue discount is common, where you draw at 98 to 99 and repay 100. Any committed revolver carries a commitment fee on its undrawn portion, by convention around 35% of the margin. Add the stack together over the expected hold and the gap widens beyond the headline margins, as our guide to the all-in cost of raising debt works through fee by fee.
The discipline is to ask every lender for an all-in cost to your expected exit on identical assumptions, and to compare those numbers rather than the margins. Cheapest headline is frequently not cheapest deal, and the dearer facility is only worth its premium when it funds something the cheaper one cannot. What the private-credit stack actually contains, fee by fee, is set out in our guide to the cost of private credit in the UK.
A bank lends around three times EBITDA; a fund stretches to four or more.
The clearest difference between the categories is quantum. On senior cash-flow terms a bank will typically lend around 2.5 to 3.5 times EBITDA to a decent lower-mid-market business, while a private-credit fund will usually stretch to 4 to 4.5 times, occasionally to five times total for a strong credit with recurring revenue. That extra turn or turn-and-a-half of leverage is the single most common reason a borrower pays the fund premium: it is buying debt the bank will not extend, not the same debt at a higher price. Where the plan genuinely needs the stretch and the cash flow can service it, the premium is the price of doing the deal at all.
Two things move the number more than borrowers expect, whichever category lends. The first is how clean the EBITDA is once add-backs are scrutinised, because every category lends against the earnings it will actually recognise, not the ones on the management pack. The second is how much of that EBITDA converts to cash, since debt is serviced out of cash and not out of accounting profit. An asset-based lender changes the question rather than the multiple: its quantum tracks the borrowing base, so an asset-rich balance sheet can release more headroom through receivables and stock than either cash-flow category would lend against the same earnings.
More leverage is not the same as the right amount of leverage. How much a business can raise is one question, and how much it should carry is another, because a heavier structure is exactly the thing that makes a slow year dangerous. Where the ceiling sits for a given business, and how the categories arrive at it, is worked through in our guide to how much your business can borrow.
A fund makes one credit decision; a bank runs a committee chain.
A private-credit fund is usually faster and more certain, because it holds the whole position and makes one credit decision, often through a committee already socialised on the deal, so it can deliver a firm, committed answer in weeks and hold it. That certainty is the second big reason borrowers pay up for a fund, especially on an acquisition against a signed sale agreement or an auction with a fixed timetable, where a lender who cannot deliver on the day is worse than one who costs more. A bank runs a more layered process, relationship team to credit committee, and above roughly £5m may need a second bank alongside it, which introduces both time and the risk that terms move between the term sheet and the money.
Certainty is not free, and it is not always needed. For a refinancing with twelve to eighteen months of runway, or a growth facility with no external clock, a bank’s timetable is perfectly adequate and its terms are cheaper, so paying a fund for speed you do not need is waste. The way to protect against a lender who promises the world on day one and cannot deliver at committee is the same on either side of the choice: understand each lender’s credit appetite before you back it, and keep a credible alternative alive until terms are firm.
That is what a competitive process does, and it is why running several lenders in parallel, across categories rather than within one, protects both the price and the timetable. A borrower who takes the first yes never learns what the best one looked like, and how we run that process is set out in how we work.
Banks test maintenance covenants quarterly; funds often run cov-loose or springing.
The covenant packages differ in kind, not just in tightness. Bank senior debt carries maintenance covenants tested quarterly, typically leverage and interest cover, sometimes a cash-flow cover test and a capex limit, so a bad run can trip a default even where nothing is missed. Private-credit funds often run leaner: a single leverage covenant, or a covenant-loose package that springs only when the revolver is drawn past a threshold. Fewer covenants, tested less often, means more operating room and less risk of a technical breach in a soft quarter, which is worth real money to a borrower running a plan with some volatility in it. That freedom is part of what the fund coupon buys.
The trade-off is not one-directional. Tighter bank covenants come with cheaper money, and on a business that comfortably fits, they never bite. Looser fund covenants come attached to a higher coupon and more leverage, which is exactly the combination that makes a slow year dangerous if you have over-borrowed. So the covenant posture cannot be read apart from the quantum it sits on: a cov-loose package on four turns of debt is a different animal from the same package on two. What to push for on either category is headroom of at least 25 to 30% against your base case and a sensible EBITDA definition, so the tests are set against the plan you actually expect to run rather than a perfect one.
The categories also fail differently. A bank covenant breach hands control to a relationship lender that generally wants the business to trade through, while a fund breach is negotiated with a counterparty priced for its downside and holding the whole position. Neither is a reason to choose blind, but both belong in the decision, alongside the leverage and pricing that our comparison of unitranche and bank senior debt sets out in full.
A bank wants a full debenture and a relationship; a fund prices for the exit.
On security the categories look alike and behave differently. Both a bank and a fund will usually take a debenture over the company, fixed charges on the assets that can carry them and a floating charge over the rest, plus a share charge and sometimes a personal guarantee, as our guide to debentures and charges explains. An asset-based lender is the exception: its security is the borrowing base itself, so it advances commonly 80 to 90% of eligible receivables and monitors the collateral closely, with verification and periodic audits that a cash-flow lender does not run. The paper differs less than the posture behind it.
Where the categories part company is the relationship. A bank is a long-term counterparty that may also hold the transactional banking, the deposits and the day-to-day facilities, and it tends to want the business to trade through a rough patch because the relationship is worth more than the recovery. Its offer is largely its offer, conservative but durable. A private-credit fund is a transactional lender that has priced its return over an expected hold and does not want you refinancing away the moment cheaper money appears, so it usually carries call protection in the early years, a non-call period or a prepayment premium that steps down, and occasionally a make-whole. Most bank term loans, by contrast, can be prepaid at par.
For a borrower who expects to exit early, on a sale or a refinancing, that difference is money: call protection can turn a keen headline rate into the dearer deal, so it belongs in the all-in comparison alongside the margin. And where the security is a personal guarantee rather than a corporate charge, what it covers and how to cap it matters more than the category lending it, as our guide to personal guarantees sets out.
Match the category to the plan the business is funding.
A bank is the right answer for the larger share of lower-mid-market borrowers. If the business is profitable and cash-generative, carries modest leverage, fits a bank’s credit boxes, and has no fixed external clock, the bank is cheaper on every line of the all-in cost, and a fund coupon would buy leverage and speed you do not need. A challenger or specialist bank extends that reach: it will underwrite a story the high street declines, a shorter track record, a sector out of fashion, a recent turnaround, often at a keener price than a fund would quote for the same risk, so it belongs in the process before the choice narrows to bank-or-fund.
A private-credit fund earns its premium in a defined set of situations, worth naming plainly. It fits when you need more leverage than a bank will extend and the extra turn genuinely funds a plan the cash flow can service; when the deal has a hard timetable and a committed answer in weeks is worth more than a cheaper one that may slip; when the credit is hard for a bank to box, a carve-out, a bullet structure, a fast-growing business a standardised policy cannot rate; and when covenant headroom and operating freedom matter more to you than the coupon. An asset-based lender fits the asset-rich balance sheet where the debtor book and stock will release more than either cash-flow category would lend against the earnings.
Two points cut across the choice. First, this is rarely binary. Challenger and specialist banks and non-bank lenders together wrote over two-thirds of SME lending in 2025, so the bank-or-fund framing is the two ends of a much wider field. British Business Bank, Small Business Finance Markets 2026. Second, the only way to know which point on that field is cheapest for your situation is to run several categories in parallel and compare firm terms, which is also the judgment an adviser paid by you, not by the lender, exists to make, as our guide to choosing a debt adviser argues.
We will tell you which category fits your raise.
If you are weighing a bank offer against a private-credit quote, or you are not sure which category your plan needs, a first conversation is confidential and costs nothing. We run banks, challenger and specialist lenders, funds and asset-based houses against each other, price the all-in cost of each on identical assumptions, and tell you plainly where the cheaper bank offer is the right one and where the premium buys something real. See how a mandate runs in how we work, or the full range of what we advise on in our services.