Parties
Direct lender
A direct lender is a fund that lends its own capital without syndicating to banks. It is one of four categories serving UK lower-mid-market borrowers, and each lends against something different.
Also called debt fund · private credit fund · direct lending · non-bank lender · bank declined my business loan · my bank said no
The categories differ most in what they lend against. That decides which one fits your balance sheet.
| Category | Underwrites |
|---|---|
| Asset-based lending house | 80-90% advance rates |
| Clearing bank | Mixed |
| Challenger or specialist bank | 45–70 on the scale |
| Private credit fund | Cash flow |
Categories from /guides/bank-vs-private-credit-for-your-business. Categories only, no ranking, no lender named.
What a direct lender is
A direct lender is a fund that lends its own capital directly to a borrower, without syndicating the loan to banks or distributing it to a market. The money comes from institutional investors, pension funds, insurers and similar, committed to the fund for a defined period and deployed as loans.
That structure explains most of the behaviour. A fund has capital it must deploy within an investment period, no depositors, no regulatory capital calculation of the kind a bank runs, and a return target its investors expect. It is therefore quicker to decide, more willing to reach for leverage, and more expensive.
Direct lending is also called private credit, and at £3-15m in the UK the usual product is a unitranche facility: one blended senior loan replacing the layered structure a bank club would use.
The four categories
A borrower at this size is choosing between four kinds of lender rather than between individual institutions, and the categories differ more than the firms within them.
Clearing banks are the traditional route: cheapest on headline cost, most conservative on leverage, and the natural home for day-to-day banking and working capital. Challenger and specialist banks sit between, often more flexible on structure and sector than a clearing bank while remaining bank-priced. Private-credit funds underwrite cash flow and reach the highest leverage. Asset-based lending houses lend against the balance sheet rather than the earnings.
Banks still account for around two thirds of UK SME lending, so direct lending is a real alternative rather than the default. For most borrowers the honest starting position is that a bank is the cheapest answer if a bank will do the deal, and the question is whether the deal is one a bank will do.
Banks still write around two thirds of SME lending. Direct lending is the alternative, not the default.
| Source | Share |
|---|---|
| Banks | 67% |
| Everything else | 33% |
Published: the two-thirds-of-SME-lending share carries the British Business Bank source on the sibling guide. The remaining third is shown as a residual, not an independent claim.
What each lends against
This is the distinction that decides which category fits, and it is more useful than comparing rates.
An asset-based lender advances against the assets themselves: receivables, stock and plant, with advance rates commonly running 80 to 90% on the eligible asset base. The facility size follows the balance sheet rather than the profit, which suits a business with a strong debtor book and volatile or thin earnings.
A private-credit fund underwrites cash flow almost entirely, which is why it reaches 4 to 4.5 times EBITDA where a bank stops at 2.5 to 3.5. A clearing bank takes a mixed view, lending against cash flow but with a conservative eye on security and on what happens if the earnings do not hold.
So a business with strong assets and weak earnings, and one with strong earnings and few assets, should be talking to different categories entirely. Neither is better; they answer different questions.
Cost, and what the gap buys
A bank term facility prices at low single digits over SONIA, giving an all-in near 6.75% at a 3% margin with SONIA at 3.73%. A unitranche prices at SONIA plus 550 to 800 basis points.
The fee stack differs too. A bank arrangement fee sits nearer 1% of the facility; a fund's runs higher and is frequently accompanied by original issue discount funding you at 98 to 99, and by call protection on an early exit. On any comparison the whole stack matters over the period you expect to hold the facility, not the margin alone.
What the gap buys is leverage, speed, a bullet repayment profile that keeps cash in the business, and a lighter covenant package. A borrower using none of those is paying a premium for optionality they will not exercise.
Speed, and why funds are quicker
Structurally rather than culturally. A fund runs a single credit committee with a mandate to deploy, no regulatory capital calculation, and no need to syndicate. A bank has more internal steps and, on larger tickets, may need more than one institution.
That matters where a transaction has a fixed date: an acquisition with a completion deadline, a competitive process, a refinancing against a maturity. A structure that costs more but completes on time can be worth considerably more than one that is cheaper and misses.
It matters very little on an unhurried refinancing, where an extra six weeks costs nothing. Paying a premium for speed is sensible when speed is what you are buying, and speed is not always what you are buying.
Each category wins on something. A borrower should know which of these they are buying.
| Dimension | Advantage |
|---|---|
| Headline cost | Bank |
| Working capital and banking | Bank |
| Speed of execution | 60–82 on the scale |
| Covenant flexibility | 68–88 on the scale |
| Leverage available | Fund |
Relative strength by dimension. Illustrative trade-off map, not a ranking, and no lender is named.
The covenant difference
A fully covenanted bank facility carries a suite of maintenance covenants, commonly three or four, tested quarterly. A fund facility typically carries fewer, often a single leverage test, sometimes springing only when a revolving facility is drawn past a threshold.
That flexibility is priced into the margin and matters most where earnings are lumpy, because a full suite tested quarterly produces technical breaches on a volatile business without anything being wrong.
It matters less than it appears in one respect: removing a maintenance covenant removes a trigger, not a lender. The protection migrates into the event-of-default and information provisions, and a fund reads the monthly numbers closely regardless.
You will probably need both
Most unitranche structures at this size pair the fund's term facility with a revolving working capital line, and that revolver is frequently provided by a bank taking a super senior position ahead of the fund.
The reason is practical. Revolving money moves daily, is operationally demanding and earns little, which suits a bank's infrastructure and not a fund's. Banks also hold the operating accounts, payments and cash management.
So a structure sold as one lender and one document often turns out to be two lenders and three documents: the term facility, the revolving facility, and the agreement among lenders between them. It is still simpler than a layered bank club, but the intercreditor does not disappear.
Which category fits which plan
A clearing bank fits a stable business at modest leverage refinancing on an unhurried timetable, where the covenant suite is not a burden because every test will be passed comfortably.
A challenger or specialist bank fits where the sector or the structure is slightly outside a clearing bank's box but the leverage is still bankable.
A private-credit fund fits an acquisition needing leverage above bank appetite, a business with volatile quarters where covenant flexibility has real value, or a fixed completion date a bank process cannot meet.
An asset-based lender fits a business whose balance sheet is stronger than its profit and loss: a strong debtor book, real stock, plant worth advancing against, and earnings too thin or too variable to support cash-flow leverage.
The way to decide is not to pick a category first. It is to establish what the business can support, what the transaction requires, and what the timetable allows, then see which categories can deliver it. Frequently more than one can, which is where a competitive process earns its keep.
Common questions
What is a direct lender?
A fund that lends its own capital directly to borrowers without syndicating the loan to banks. The money comes from institutional investors committed for a defined period. Direct lending is also called private credit, and at £3-15m in the UK the usual product is a unitranche facility.
How is a direct lender different from a bank?
A fund has capital it must deploy, no depositors, no bank regulatory capital calculation and a return target its investors expect. It decides faster, reaches higher leverage at 4 to 4.5 times against a bank's 2.5 to 3.5, carries lighter covenants, and costs more: SONIA plus 550 to 800 basis points against low single digits over SONIA.
Which lender categories are active at £3-15m?
Four. Clearing banks, challenger and specialist banks, private-credit or direct-lending funds, and asset-based lending houses. They differ most in what they lend against, which matters more than comparing headline rates.
How much of UK SME lending do banks still do?
Around two thirds. Everything else, including challenger and specialist lenders, private-credit funds and asset-based lending houses, makes up the remaining third. Direct lending is a genuine alternative rather than the default route.
When is an asset-based lender the right answer?
Where the balance sheet is stronger than the profit and loss: a strong debtor book, real stock, plant worth advancing against, and earnings too thin or variable to support cash-flow leverage. Advance rates commonly run 80 to 90% of the eligible asset base, so the facility follows the assets rather than the profit.
Are direct lenders faster than banks?
Generally yes, for structural reasons: a single credit committee with a mandate to deploy, no regulatory capital calculation and no need to syndicate. That matters where a completion date is fixed, and matters very little on an unhurried refinancing where six extra weeks cost nothing.
Will I still need a bank if I use a direct lender?
Usually, for working capital. Most unitranche structures pair the fund's term facility with a revolving line, frequently from a bank taking a super senior position ahead of the fund, and banks typically hold the operating accounts and payments. A structure sold as one lender is often two lenders and three documents.
How do I choose between the categories?
Do not pick a category first. What the business can support, what the transaction requires and what the timetable allows, then see which categories can deliver it. Frequently more than one can, which is exactly where running a competitive process earns its keep.
The full treatment sits in the guide: bank vs private credit for your business.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.