The lender across the table has changed. Where a bank once anchored most lower-middle-market debt conversations, a private credit fund now often does. Direct lending has grown into a market of roughly $1.5 to 2 trillion, on par with the broadly syndicated loan market. These lenders move faster, hold what they originate, and will structure around situations banks cannot touch. For a founder weighing growth capital, an acquisition, or partial liquidity without dilution, that is a genuine expansion of the toolkit.
The flexibility is real, and so is its price. Direct loans still price wide of bank debt, though the gap has narrowed: median spreads on new direct loans compressed from about 716 basis points in early 2023 to 544 by the end of 2025 as syndicated lenders competed back, and direct lenders holding roughly $500 billion of dry powder compete for the same borrowers. More important than the rate is the structure: maintenance covenants, usually tested quarterly, amortization schedules, cash sweeps, and the lender's behavior when the plan slips. Banks and funds respond differently to stress, and a founder should know which counterparty they are choosing.
That behavior is now being tested. Proskauer's Private Credit Default Index rose from 2.46 percent in the fourth quarter of 2025 to 2.73 percent in the first quarter of 2026. The level is low. The direction matters, because a founder who takes leverage this year will meet a lender that has spent it managing its first real cohort of problems, and the documents decide what that experience means for the borrower.
Reading a term sheet beyond the headline rate is a discipline. What does leverage look like against a conservative plan rather than the management case. Which covenant trips first, and how much room sits above it. What consents will the lender hold over acquisitions, distributions, and the next raise. What does the path look like if the company wants to refinance early.
The honest comparison is rarely debt versus nothing. It is debt versus a smaller raise, versus equity, versus patience. Leverage that lets a founder keep ownership through a period of real compounding can be an excellent trade. Leverage that meets a soft stretch head-on can define everything that follows. Both outcomes are written into the documents long before either happens.
The good lenders are professionals and mostly candid. The founder's job is to arrive equally prepared: a real downside case, a covenant model, and advisors who know which lenders behave well when plans meet reality. Speed and flexibility are worth paying for. Surprise is not.
