Private Credit in Australia: Challenges and Key Considerations for Companies

As traditional bank lending tightens and capital markets remain volatile, many Australian companies are continuing to turn to private credit as an alternative source of financing. Once seen as a niche, private credit has evolved into a mainstream funding option, particularly for mid-market businesses, real estate developers, and firms seeking bespoke or time-sensitive capital solutions.

In Australia, the growth of this market has been accelerated by the retreat of major banks from certain lending segments, combined with a growing pool of institutional investors seeking yield. But while private credit offers flexibility and speed, it also brings a unique set of challenges and risks. For companies considering this route, it is essential to understand the trade-offs and undertake a deliberate, strategic approach.

Private credit—debt provided by non-bank lenders such as private funds, superannuation-backed investment managers, and family offices—offers a range of benefits:

• Customised financing solutions tailored to complex or non-standard borrower needs
• Faster decision-making compared to banks
• Willingness to lend in situations where banks may not (e.g., special situations, transitional assets)
• Reduced regulatory burden, enabling greater deal structuring flexibility

These advantages are attractive to companies facing time-sensitive capital requirements, undergoing corporate restructuring, or operating in sectors where banks are cautious—such as construction, hospitality, and early-stage ventures.

However, these benefits must be weighed against the specific challenges that come with relying on private credit.

Higher Cost of Capital

Private credit typically carries a significantly higher cost than traditional bank loans. This reflects both the perceived risk profile of the borrower and the return expectations of private credit investors, who are often targeting double-digit yields.

Costs often include:

• Higher base interest rates
• Upfront arrangement or commitment fees
• Exit or early repayment penalties
• Potential equity components (e.g., warrants, convertible notes)

This cost premium is acceptable in some cases—especially where the financing drives growth or value creation—but can be prohibitive if not properly planned.

Complex Covenant Structures

Private lenders frequently impose detailed and tight covenant frameworks. These may include:

• Financial covenants (e.g., interest cover ratios, leverage ceilings)
• Reporting requirements (monthly or quarterly)
• Restrictions on dividends, acquisitions, or asset sales

In some cases, covenants may be more onerous than those imposed by banks, particularly when a lender takes a quasi-equity view and seeks deeper operational visibility. For businesses with volatile cash flows or limited internal finance teams, these obligations can become a real challenge.

Shorter Loan Terms and Refinancing Risk

Unlike bank loans that may stretch out over 5–7 years, private credit typically operates on shorter durations, often between 1–3 years. This means borrowers need to plan for refinancing or exit early and be confident in the timing and predictability of their capital events.

Limited Liquidity and Flexibility

Private credit markets are inherently less liquid than public debt markets or syndicated bank facilities. Loans are generally held to maturity, and secondary trading is limited or non-existent. This limits flexibility and can make restructuring difficult if the business runs into financial distress.

Market Opacity and Inconsistent Standards

Australia’s private credit market remains relatively opaque. Unlike public or syndicated markets, there is no central source of pricing data, covenant benchmarks, or deal activity.

To manage these risks effectively, companies should adopt a disciplined approach to assessing private credit. Key considerations include:

1. Have a Defined Use Case

Private credit should serve a clear, strategic purpose—such as funding an acquisition, enabling expansion, or restructuring a balance sheet. It should not be used to mask cash flow problems or fund ongoing losses.

2. Understand the True Cost of Debt

Companies should look beyond the headline rate and model out the all-in cost of capital, including fees, prepayment terms, and any performance-based components. For leveraged deals, sensitivity analysis should be conducted to test the business's ability to meet repayment obligations under different scenarios.

3. Negotiate Covenants Thoughtfully

Financial and operational covenants should be tailored to the business’s actual risk profile and performance cycle. Overly restrictive covenants can trigger technical defaults, even if the business is otherwise healthy. Negotiation is essential—many lenders expect it and will accommodate reasonable requests.

4. Plan for Exit or Refinance Early

Because of the shorter terms common in private credit, a refinancing or exit strategy should be built in from the outset. Whether it's refinancing into bank debt, raising equity, or executing a sale, companies should map out the timing, dependencies, and risks of their repayment path.

5. Choose the Right Partner

Not all private lenders are created equal. Some operate with long-term partnership mindsets, while others have shorter investment horizons or aggressive enforcement approaches. Companies should diligence the lender’s reputation, portfolio style, and prior workout history, ideally with the help of an adviser.

Private credit is playing an increasingly important role in Australia’s corporate funding landscape. For many businesses, it can be a valuable tool—unlocking capital that would otherwise be out of reach. But it is not without significant complexity, cost, and risk.

Companies considering private credit must go in with eyes wide open—armed with a strong strategic rationale, a clear repayment plan, and the right advice to secure terms that support, rather than strain, their long-term success.