Unitranche or bank senior. Which is right for your company?
Neither is better in the abstract, and asking which one wins misframes the choice. Bank senior debt and unitranche are two points on a spectrum of capital, priced for different things. A clean, lowly-geared business that fits a bank’s credit policy will almost always be cheapest with a bank, and the unitranche coupon would be money wasted. A borrower who needs more leverage, a bullet repayment, an acquisition line or completion in weeks is buying certainty and stretch a bank cannot offer, and the premium can be the cheapest way to get the deal done. This guide sets out exactly how the two differ, at July 2026 market rates, so you can see which side of that line your situation sits on.
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.
One document from a fund, or a bank’s senior loan.
Bank senior debt is the traditional structure. A deposit-funded, PRA-authorised bank lends you a term loan, usually alongside a committed revolving credit facility for working capital, secured by a debenture over the company and priced at a margin over SONIA. It sits at the top of the capital structure, so it is repaid first if anything goes wrong, and it amortises on a fixed schedule over three to five years. The bank underwrites against a standardised credit policy and holds its own position, and the offer is largely the offer.
Unitranche is a single facility from a non-bank direct-lending fund that blends what used to be arranged as separate senior and junior tranches into one loan, at one blended margin, under one agreement. You sign one document, deal with one lender, and draw down once. The fund lends committed capital raised from pension funds and insurers rather than depositors’ money, so it has no branch network and no deposit base to protect, and it underwrites on forward cash flow and the business plan rather than on a branch relationship. Because it holds the whole ticket itself, it can give a deliverable answer quickly and take a single position a bank would want to syndicate.
The structural distinction that drives everything below: a bank is lending cheap, regulated, deposit-backed money against security and covenants, and is conservative on quantum by design; a fund is lending more expensive, patient capital against a credit it believes in, and will stretch further for a return. The deeper mechanics of a single-tranche facility, and why a borrower would fold two tranches into one, sit in our hub answer on what unitranche is and why it costs more.
Look past the margin to the all-in cost to exit.
Both facilities are 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 whole comparison is a comparison of margins and fees on top of the same reference rate. On a clean, secured, lower-leverage deal a bank margin is a low single-digit spread over SONIA, a point or two on the keenest credits and more as risk rises. A unitranche fund prices materially higher. In the UK mid-market at 2026 rates, unitranche is broadly SONIA plus 550 to 800 basis points — at July-2026 SONIA 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 1.5% to 3% on a fund deal, and on unitranche often an original issue discount, where you draw 98 and repay 100. Both carry a commitment fee on the undrawn portion of any revolver, usually around a third of the margin, and a margin ratchet that flexes the rate with leverage, so deleveraging earns you a lower coupon over time. Add it together over the expected hold and the gap is real: a unitranche quoted at SONIA plus 6.5% with a 3% fee and a 1% discount costs noticeably more than the headline 6.5% suggests over a three-year life, while a bank term loan at a low single-digit margin with a ~1% fee and no discount is cheaper on every line.
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 more expensive facility is only worth its premium when it funds something the cheaper one cannot. The mechanics of the full pricing stack, margin, fee, discount, commitment fee and ratchet, are set out in the hub answer on what you are really paying all in.
Cost of capital across the structure, from senior bank debt to subordinated.
| Category | Range |
|---|---|
| Clearing & relationship banks | Senior, keenest |
| Asset-based & asset-finance | Against the asset base |
| Challenger & specialist banks | On its own terms |
| Private credit & unitranche | Flexibility, priced |
| Junior / mezzanine / PIK | Subordinated |
Indicative all-in cost of capital by category, relative to a senior bank facility.
A fund lends further and tests less often.
The clearest difference 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. A unitranche fund will usually stretch to 4 to 4.5 times, occasionally to five for a strong, sponsor-backed credit with recurring revenue. That extra turn or turn-and-a-half of leverage is the single most common reason a borrower pays the unitranche premium: it is buying debt the bank will not extend, not the same debt at a higher price. Two things move the number more than borrowers expect, whichever lender you use: how clean the EBITDA is once add-backs are scrutinised, and how much of it converts to cash.
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. Unitranche funds often run leaner: a single leverage covenant, or a covenant-loose package that only springs when you draw the revolver. 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 unitranche coupon buys, and part of why a fund can underwrite a more ambitious plan.
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. What to push for on either, headroom of at least 25 to 30% against your base case and a sensible EBITDA definition, is covered in the hub answer on what covenants are market and what to push back on, and the question of how much leverage to actually take, as opposed to how much you can raise, is its own decision.
One credit decision versus a committee chain.
A unitranche fund 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 unitranche, 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 on a larger ticket may need to syndicate, 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 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: 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 we run several lenders in parallel rather than negotiating with one, as we set out in how we work.
One agreement, but call protection to weigh.
On documentation, unitranche is simpler on the page. One facility agreement, one lender, no intercreditor arrangement between a senior and a junior tranche to negotiate, so the legal process can be faster and cleaner than a bank club with a working-capital line and an amortising term loan sitting alongside it. Bank senior debt typically means a facilities agreement covering both the term loan and the revolver, a debenture and share charge, and, where more than one bank participates, an agreement between them on ranking. The paper is more familiar to most advisers and lawyers, but there is more of it.
Where the documents diverge most, and where it costs real money, is prepayment. Most bank term loans can be repaid early at par, and a bank revolver can be drawn and repaid freely within the term, which is one of its quiet advantages if you expect to sell or refinance. Unitranche is different, because the fund 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, often a non-call period followed by a prepayment premium that steps down, for instance 2 to 3% in year one, falling to par by year three. Occasionally a make-whole applies, which compensates the fund for interest it would have earned and can be expensive.
For a borrower who expects to exit early, on a sale or a refinancing, call protection can turn a keen headline rate into the dearer deal, so it belongs in the all-in comparison alongside the margin. Ask for the protection to fall away sooner, or for a carve-out that lets you prepay at par on a change of control. The full shape of prepayment terms, and how to negotiate them before you sign rather than discover them when you want out, is in the hub answer on early repayment and what it costs.
Match the structure to the plan the business is funding.
Bank senior debt 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 the unitranche coupon would buy leverage and speed you do not need. For a steady, ungeared trading company refinancing a maturity from a position of strength, or funding an asset with a measurable return, the bank is the correct choice as well as the safe one, and an adviser paid by you should say so rather than steer you to the priciest option in the room.
Unitranche earns its premium in a defined set of situations, worth naming plainly. It is the right tool 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, an acquisition against a signed agreement or a competitive auction, and a committed answer in weeks is worth more than a cheaper one that may slip; when the credit is one a bank finds hard to underwrite at the speed or shape you need, a carve-out, a bullet structure, a fast-growing business a standardised policy cannot box; and when covenant headroom and operating freedom matter more to you than the coupon. In those cases the premium buys execution and flexibility as much as money, and is frequently the cheapest way to get the deal done at all.
Two points cut across the choice. First, this is rarely a binary. The field between a clearing bank and a unitranche fund includes challenger and specialist banks that will underwrite a story the high street will not at a keener price than a fund, and asset-based structures that can release more headroom than either cash-flow route on an asset-rich balance sheet. Challenger and specialist banks and non-bank lenders together wrote over two-thirds of SME lending in 2025, so the two options in this guide’s title are the ends of a much wider spectrum. British Business Bank, Small Business Finance Markets 2026. Second, the only way to know which point on that spectrum is cheapest for your situation is to run both, and more, in parallel and compare firm terms. A borrower who takes the first yes never learns what the best one looked like.
We will tell you which side of the line you sit on.
If you are weighing a bank offer against a fund quote, or you are not sure whether your plan needs the leverage a unitranche buys, a first conversation is confidential and costs nothing. We run both against each other, and the rest of the market with them, and give you a straight read on the all-in cost of each, including where the honest answer is that the bank’s cheaper offer is the right one. See how a mandate runs in how we work, or the full range of what we advise on in our services.