The success of Small and Medium Enterprises (SMEs and mid-sized businesses) is vital to the functioning of the local and global economies. It remains crucial for these businesses to have access to the finance they need to invest, grow and provide jobs across the country. Private credit managers offer an increasingly important source of funding for Canadian businesses, with several dozen local lenders providing billions in financing to our economy. Furthermore, private credit forms a key part of Canadian institutional investor portfolio allocations, with CPP Investments, for example, investing over $35B in the asset class globally.
Looking ahead, access to finance is likely to be a critical factor for SMEs and mid-sized businesses as they adapt and modernise in response to COVID-19 as well as newer trends in customer demand and behaviour. With traditional bank lending more difficult to secure, private credit works to fill this financing gap. It is therefore essential to cultivate more sources of capital to support businesses across Canada.
As well as increasing the availability of capital, it is necessary to diversify the type of capital which is available. This will support SMEs and mid-sized businesses whose financing needs fall outside the risk appetite of existing capital providers, despite being viable businesses. It will also provide businesses with greater choice and support competitive finance markets.
Private credit managers pride themselves on offering loans that work with the specific needs and circumstances of the borrower. This allows these businesses to invest in their future, create jobs and compete in a global marketplace. Lenders often specialise in certain business sectors and are therefore able to offer tailored solutions based on a bilateral relationship created with borrowers. In addition, private credit lenders are well placed to support underperforming businesses in the sustainable return to viability and growth. Rehabilitation, rescue and recovery of an organisation facing decline protects economic value and preserves jobs. This is especially important as businesses continue to adjust to the changing economic circumstances as a result of the global pandemic.
Despite the growth of the private credit industry in Canada during the past decade, many business owners remain unfamiliar with this group of lenders and the lending solutions they can offer.
This introductory guide offers an overview of who private credit lenders are, how they lend and work in partnership with businesses to help them succeed. It outlines whether private credit might be the right fit for a business, how these lenders conduct due diligence, what to expect in a loan agreement and what to expect once a loan has been extended. In addition, it includes a glossary of key terms as well as case studies that provide real life examples.
The value of this type of long-term finance is well recognised by both businesses and policymakers. The Alternative Credit Council (ACC) is pleased to support expanded capacity and sustainable growth in the real economy while educating investors, borrowers, policymakers and others on benefits and trends impacting the private credit sector. It is our hope that this guide will complement that work by raising awareness among Canadian businesses and demonstrating that private credit is an established and viable financing option for them to invest in their business.
The Alternative Credit Council Canada Committee hopes this guide will assist both borrowers in considering private credit as a viable option to support the growth of their businesses, as well as investors.
Global Head of the Alternative Credit Council
banks. It typically involves lending to companies on a bilaterally negotiated basis, with financing sizes ranging between $1 million and $250 million. Private credit lenders engage with borrowers via direct relationships which helps support their understanding of the borrower’s business. This allows lenders to offer flexible and tailored finance solutions to match the unique needs of each borrower.
What types of private credit loans are available?
Private credit firms will engage in considerable due diligence and typically invest in only a small
percentage of the businesses they assess. This ensures that both the lender and borrower are
the right fit for each other. Factors a firm would typically analyse may include a business’s sector
and key markets, financials, corporate governance, collateral, management culture and, increasingly
Environmental, Social and Governance (ESG) factors.
Why is ESG important to private credit lenders?
they are lending to. This means that they will ask businesses questions about things such as
their energy use, adherence to labour standards and corporate governance. This supports their
understanding of how a business is being managed alongside more traditional financial metrics.
Private credit firms are regulated as asset managers and the funds they manage are subject to ongoing
regulatory supervision and oversight. Businesses benefit from the same safeguards and borrower
protection rules when working with private credit lenders as they would do with any other finance
What does a loan agreement look like?
A loan agreement should stipulate the purpose of the finance sought, the term of the loan, and the
conditions of repayment such as interest rates. Loan agreements will also include undertakings or
covenants, outlining the terms borrowers agree to comply with and upon which the provision of the
loan is conditioned. An example term sheet can be found on page 33 of this guide.
of stress or challenging circumstances are likely to be identified early. This provides more time for
both parties to proactively engage and address any issues. The individuals working with a business to
mitigate the stress will often be the same people who were involved in the initial lending process.
This means they will have a detailed understanding of the business and its market to better inform how
to get back on track.
How to get in touch with a private credit lender?
If you would like to learn more about financing your business, we encourage you to contact the following private credit lenders and debt advisory practices who are active in Canada.
Each lender will have their own areas of specialisation. For example they may focus on specific sectors, businesses of particular sizes or at certain stages of their development. Undertaking some initial research on these lenders before contacting them will help you identify the lender who is most likely to be suited to your business. This is also an area where debt advisors can assist in helping you understand the potential options that are available to you.