Private credit fits when the loan is going to make the business worth more, and it does not fit when the loan is there to buy time. That single test settles most cases, and plenty of companies fail it before a term sheet is ever drafted. The two uses were separated by Arif Bhalwani in an email to investors in 2018 with some impatience. About half of all new loans in the broader market that year were going toward what the letter called opportunistic purposes. Extending a maturity date. The existing debt rate is lowered. Dividend payments to shareholders. Neither of those things built anything. Putting the rule in practice meant putting capital only where it would increase the value of the borrower.
Why not simply wait?
Companies wait because the bank has not said no yet and waiting looks free. It is not free. The same letter noted that larger financings were taking longer and longer to get done through bank channels, which left well-run companies with more uncertainty on timing than smaller or weaker ones. A business with capital spending planned against a supplier contract, a lease, or a competitor’s move cannot work with a lender that might close in six months or might not.
- Timing is frequently the deciding reason. A lender that can commit on a date the company can plan around is worth more than a cheaper facility that shows up late.
- Bhalwani wrote about a long period in which businesses had been taking on debt without spending it on machinery and equipment, and said plainly that investment stalled for too long reduces a company’s long-term potential in a way that cannot be recovered. A company that sees itself in that description has already got its answer.
- Easy terms and easy waiting usually come together. By the time the company actually needs the money, the terms have moved.
Looking at the lender
Fit goes in both directions. A company choosing a private credit partner should study the lender at least as carefully as the lender studies the company, because the relationship will outlast the first few good quarters. The letter argued that lenders who had spent years handling complicated loan workouts would have a clear edge once defaults started rising again. From the borrower’s side, that same experience matters for a different reason. The lender who has seen a bad stretch before is the one least likely to overreact when the company has one. Private lenders also vary a great deal in how involved they expect to be after closing. Some want a quarterly report and nothing more. Others expect to be in the room for hard decisions. A company should know which it is signing up for. And it should notice whether the lender wants this particular business or wants to fill a slot, since the two behave very differently when conditions turn.
Avoiding the slow decline
The letter’s sharpest warning was about what Bhalwani called zombie companies. Businesses that could not cover their interest from earnings, whose assets were worth less than what they owed, and which had survived for years on abundant cheap credit that let them postpone a reckoning without ever fixing the underlying problem.
So the final question is whether the loan moves the company away from that condition or toward it. Capital that funds real growth and gets the business to a point where it could repay from its own operations is the right fit. Capital that keeps a weak position alive for another year is the wrong one, no matter how reasonable the terms look on the page.
