Direct lending

Quick facts

Direct lending is a type of private debt financing, i.e. it refers to debt investments that come from institutions other than banks. Lenders (usually asset management companies) combine their capital together into a professionally managed fund, which provides debt products to businesses. Unlike publicly listed corporate bonds, private debt products are usually illiquid and not regularly traded on public markets.

How does a direct lending fund work? Asset management companies (AMCs) such as hedge funds, private equity firms and insurance companies raise pools of money from investors who are interested in high-risk, high-yielding debt. These AMCs then lend directly to companies, corporate groups and subsidiaries – or to special purpose vehicles established to finance specific projects or assets – in the same way that banks would lend to them. A direct lending fund might act alone or club together with other funds.

You could consider private debt if you are looking to raise working capital for business growth (see growth finance), infrastructure, real estate development or a buyout.

The tighter regulatory capital requirements that followed the 2008 global financial crisis forced banks to cut back on lending to businesses. Non-bank lenders stepped in to plug the gap by providing direct lending to fast-growing, medium-sized and large businesses. 

Direct lending comes under the umbrella of private debt (also known as private credit), which includes mezzanine finance and special situations.

Defining terms

The term ‘direct lending’ is sometimes used interchangeably with ‘private lending’, ‘private debt’ or ‘private credit’ but we see direct lending it a subset of ‘private debt’.

Private debt is an umbrella term that refers to debt products that are financed by non-bank institutions. Unlike publicly listed corporate bonds, private debt products are usually illiquid and not issued or traded on public markets. Private debt (also known as private credit) includes direct lendingmezzanine finance and special situations.
Alternative finance is a catch-all term for any type of business finance that does not come from a mainstream provider such as a high street bank.

Put simply, alternative finance describes any finance provided outside of the traditional banking system. Some people have a narrower definition that includes only the internet-based platforms on which borrowing and lending take place, usually between private individuals and businesses. We however prefer the broader definition.

Banks often have lending criteria that smaller businesses can’t meet, which is why businesses might look at non-bank options such as:

Debt financing is a broad term that covers any type of loan that you pay back, with interest, over a set period of time. A loan can come either from a lender – see business loans – or from selling bonds to the public.

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