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Private credit is business lending made by nonbank lenders, usually through privately negotiated loans. Compared with a bank loan arranged for a company, it may offer a more tailored process and quicker execution, but it is generally harder to trade and less publicly transparent. It can also cost more. The distinction is about who makes and distributes the loan—not whether banks have any role in the funding chain.
What private credit means
In this article, private credit means loans to businesses made by nonbank lenders such as private debt funds, business development companies (BDCs), and related investment vehicles. It is not a synonym for every kind of financing provided to a privately owned company. Definitions vary by institution and by which strategies are counted; the Federal Reserve’s 2024 overview describes several strategies, with direct lending as a major one rather than the whole category. Federal Reserve, February 23, 2024; SEC remarks, October 15, 2024.
Direct lending is one part of the market
In direct lending, a fund or related vehicle negotiates a loan with a company, either on its own or alongside a small group of lenders. Other private credit strategies include mezzanine, special situations, distressed debt, venture debt, and infrastructure debt. Their borrowers, risks, and loan structures can differ, so not every observation about direct lending applies to every private credit strategy.
How private credit differs from bank lending
“Bank lending” can describe two different arrangements: a bank lending to a company and a bank arranging a loan that is then distributed to investors. The second is often called syndicated lending. Private credit is generally distinguished by the nonbank lender’s role and the privately negotiated, less widely distributed loan.
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| Feature | Private credit | Bank-originated or syndicated lending |
|---|---|---|
| Typical originator | Nonbank private debt fund, BDC, or related vehicle | Commercial or investment bank |
| Negotiation and distribution | Often negotiated bilaterally or with a small lender group; lenders may hold the loan | Often arranged or underwritten by a bank and syndicated to a wider investor base |
| Terms and process | Can be customized, with potential for faster execution and flexibility | More standardized; terms are shaped by syndicated-market investor demand |
| Common borrower profile | Often middle-market, unrated, or higher-risk businesses | Broad range; syndicated leveraged loans also serve risky middle-market businesses |
| Cost, liquidity, and transparency | Often higher borrowing cost, with less secondary-market liquidity and less public transparency | Often more liquid and standardized, and borrowers typically benefit from lower costs when investor demand is strong |
| Bank connection | Banks may lend to or otherwise fund the private credit vehicle | Banks arrange and distribute loans and may retain some exposure |
These are typical distinctions, not a strict divide. The Federal Reserve notes that private credit and leveraged loans compete for some of the same borrowers, and companies may shift between them as financing conditions change. The benefits of private credit—speed, certainty, flexibility, customization, and confidentiality—are possible advantages, not guarantees for every deal. Actual pricing and terms depend on the borrower and market conditions. Federal Reserve, August 11, 2026.
Why a company might borrow from a private credit fund
Negotiated terms and execution
A company may value having a direct relationship with a lender or small lender group. A privately negotiated process can make it possible to tailor terms to the borrower and potentially execute faster than a broadly syndicated deal. That may matter when financing needs are time-sensitive or the company values confidentiality. It does not mean every private loan closes faster or offers more favorable terms.
Access for borrowers that may not fit a broad market deal
Private credit often serves middle-market, unrated, or higher-risk businesses. But the distinction is not simply “small or risky company versus large, safe company”: syndicated leveraged loans also finance risky middle-market borrowers, and there is overlap between the markets.
What borrowers give up—and what investors should understand
Cost and liquidity
Private loans commonly have less secondary-market liquidity than syndicated loans. Borrowers typically benefit from lower costs in syndicated markets when investor demand is strong, according to the Federal Reserve’s August 2026 comparison. A private loan may therefore carry a higher cost in exchange for potential process or terms advantages; the trade-off is deal-specific.
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Disclosure and valuation
Because private loans trade less often and public disclosure is more limited, outside investors may find it harder to assess current values and risks. A fund’s reported volatility may look lower when its assets are not frequently traded; that alone does not establish that the underlying credit risk is lower. Valuation practices and illiquidity also matter. Federal Reserve, February 23, 2024.
Loan terms vary
Private loans are often floating-rate and may be senior secured, but neither feature applies to every loan. Collateral, covenants, payment terms, and other protections depend on the strategy and the individual deal. The label “private credit” does not tell a borrower or investor enough to evaluate a particular loan.
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How large is the U.S. private credit market?
The Federal Reserve’s May 2026 Financial Stability Report estimated about $1.4 trillion in U.S. private credit loans in the second half of 2025. It estimated that these loans represented about 10% of total U.S. nonfinancial corporate debt and about one-third of below-investment-grade U.S. corporate debt, excluding bank loans, over that period. These are estimates with defined categories, not a universal measure of every activity described as private credit. Federal Reserve, May 2026 Financial Stability Report.
In an August 2026 comparison, the Federal Reserve put the U.S. private credit and leveraged loan markets at roughly $1.4 trillion each at the end of 2025. The report’s data cutoffs differ by vehicle and market series, so the figures should not be read as measurements taken at one identical observation date for every component. Federal Reserve, August 11, 2026.
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These estimates are U.S.-specific and should not be combined directly with older global estimates: market size changes with geography, strategy coverage, and data source. For context, the Federal Reserve’s February 2024 note estimated nearly $1.7 trillion in total private credit and $800 billion in direct lending using data through June 2023; those are older figures with a different vintage, not current market totals. Federal Reserve, February 23, 2024.
Private credit and bank lending are connected
A nonbank fund may originate the loan to a company while a bank provides financing to the fund or its vehicle. Banks can therefore be part of private credit’s funding chain even when they are not the company’s direct lender. The practical distinction is the channel through which the company’s loan is made and held, not a claim that banks and private credit operate separately. Federal Reserve, May 2026 Financial Stability Report.
What individual investors should know about access
Traditional private debt funds often have long lockups. The Federal Reserve’s May 2026 report says more individual investors are gaining exposure through semi-liquid perpetual-life BDCs and interval funds. Their redemption offers are governed by fund terms and may be capped; they are not the same as daily access to cash. The report also described increased redemption requests in these vehicles and said most managers chose to cap redemptions; it characterized aggregate outflows in the first quarter of 2026 as manageable. That describes conditions at the time of the report, not a permanent guarantee about future liquidity. Federal Reserve, May 2026 Financial Stability Report.
Risk is also difficult to judge from a short history alone. In its February 2024 note, the Federal Reserve cautioned that the sector had not been through a prolonged recession and that limited data made risks difficult to assess. That warning reflects the note’s publication date and should not be mistaken for a complete current assessment of every fund or loan.
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