Private credit in Canada explained: direct lending vs banks, common deal structures, costs, covenants, and how lenders underwrite—plus a borrower checklist.
Private credit (also called direct lending or private lending) is business financing provided outside public bond markets—typically by private funds, finance companies, and institutional investors—through privately negotiated loan terms. For Canadian business owners, it matters because it can be faster and more flexible than bank lending, but it usually comes with tighter reporting, stricter covenants, and a higher all-in cost.
This guide explains what private credit is in Canada, how it’s priced and structured, what lenders actually look for (the “credit brain”), and a practical checklist to decide if it fits your situation.
Private credit is not a stock-market product and it’s not public bonds. It’s credit arranged privately between a borrower and a lender (or a small group of lenders). Investors like Mawer describe private credit as privately negotiated financing arrangements (“bilateral” or “club deal”). (Mawer) Wealthsimple’s Canadian fund education page uses a similar definition: loans made directly to companies, not issued or traded on public markets. (Wealthsimple Help Centre)
What it is (borrower view):
What it isn’t:
Private credit grows when borrowers want certainty and speed—and when banks are more selective.
Two big Canadian realities drive the conversation:
Borrower takeaway: private credit can be a great tool, but it’s not “free money.” The same flexibility that helps you close a deal can also create tighter controls after closing.
At a high level, private credit is most useful when a borrower needs one (or more) of the following:
AIMA’s Canada borrower guide frames private credit as direct relationships with borrowers and cites deal sizes ranging widely (often mid-market), with tailored solutions. (acc.aima.org)
Private credit isn’t one thing—it’s a menu. Here are the structures you’ll see most often:
Key point: Approval is driven by the business’s ability to service debt from cash flow, with security as backup.
Key point: Approval is driven by collateral value and liquidity, not just EBITDA.
Here’s a simple “what it’s best for” view:
Key point: Private credit pricing is “rate + structure + control.” The interest rate is only one piece.
Your all-in cost can include:
From a credit/risk standpoint, lenders price for risk: higher uncertainty = higher spread and sometimes higher fees. A lending text we use internally describes “pricing for risk” and notes lenders may charge fees where higher monitoring is required.
Practical borrower tip: when comparing offers, ask for the true all-in cost:
Key point: Private lenders still underwrite like lenders. The best way to predict an approval is to think in underwriting frameworks.
A standard credit framework is the “5Cs”: character, capacity, capital, collateral, and conditions.
Here’s what that looks like in private credit:
Even when a lender doesn’t say it, they’re managing:
OSFI’s capital rules explicitly describe PD, LGD, and EAD as core credit risk components in the IRB approach. (OSFI)
How this changes your deal strategy:
Key point: Private credit is flexible upfront, but usually stricter after funding. That strictness shows up as conditions precedent and covenants.
A common definition:
The same source gives classic conditions precedent examples like “all security in place” or “professional valuations completed,” noting it’s harder to ensure these happen after lending occurs.
Expect some combination of:
Examples of “basic” monitoring covenants include LTV tests and required delivery timing for annual and management accounts.
Borrower takeaway: covenants aren’t “bad.” They’re the price of getting capital when a lender can’t rely on standard bank comfort.
Key point: lenders don’t wait for a default—they watch for drift.
A prudent lender wants warning signs before a missed payment. In private credit, monitoring often shows up as:
Triggers that get attention fast:
This is where good borrowers win: they communicate early and propose a fix before the lender forces one.
Key point: private credit often sits in the middle—more flexible than banks, more structured than “fast” products.
A useful mental model: the less a lender relies on audited statements and traditional ratios, the more they rely on controls and pricing.
Key point: private credit can solve problems—but it introduces new ones you must manage.
Private credit can be used as a bridge—but if rates drop or bank windows open later, refinancing may or may not be available on your timeline.
Covenants can force you to address issues early—which is good for survival, but stressful if your business is seasonal or volatile.
Institutional leaders have warned that speed and looser diligence can increase risk in parts of the market. (Financial Times)
The Bank of Canada notes that high-quality data aren’t readily available for all non-banks, making analysis and monitoring more challenging than for banks. (Bank of Canada)
Borrower translation: some lenders compensate for less visibility with more frequent reporting.
Key point: the fastest approvals happen when you package the deal like an underwriter would.
Scenario:
An Ontario-based manufacturer needed a new packaging line and working capital to support a large new customer contract. The business was profitable but had lumpy cash flow (inventory builds and long receivable cycles). Their bank was hesitant to increase exposure quickly because leverage would rise during the ramp.
What we structured (leasing-first where it made sense):
Why it got approved (underwriter logic):
Result:
They funded on time, hit the ramp milestones, and later refinanced part of the working capital facility once cash conversion stabilized—keeping the equipment lease in place because it matched the asset’s lifecycle.
Yes. Private credit is a broad category of privately negotiated lending arrangements. The legal and regulatory details depend on the lender type (bank vs non-bank), the structure, and the investor vehicle. (GLI)
No. While many private credit deals are mid-market, private lending and finance-company structures can serve smaller businesses too—especially where assets or receivables provide support. (acc.aima.org)
Often, yes on an all-in basis—because you’re paying for speed, flexibility, and willingness to underwrite complexity. But it can still be cheaper than “fast money” products when structured properly.
Expect reporting covenants and performance tests (coverage/leverage) and, in collateral-backed deals, LTV or borrowing base tests. Covenants exist to monitor after funding.
They’re requirements that must be satisfied before money is advanced (e.g., security registered, valuations complete). Lenders insist because it’s harder to enforce after funding.
Treating it like a one-time transaction instead of a monitored relationship. The best outcomes happen when borrowers budget time for reporting, maintain covenant headroom, and communicate early when performance shifts.
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