Six kinds of lender serve established private companies in the lower middle market. Banks lend at the lowest cost, within tighter limits and often with a personal guarantee. Asset-based lenders lend against receivables and inventory rather than earnings. Private credit funds and BDCs lend further on steady earnings, at a higher rate, often in one unitranche loan. Mezzanine funds and SBICs supply the junior layer behind a senior lender. Family offices bring flexible capital deal by deal, and insurance companies lend long-term fixed-rate money, mostly at the upper end. Which lenders you approach shapes the structure you get.
- Lowest cost
- Banks, with tighter covenants and often a personal guarantee
- Lend against collateral
- Asset-based lenders: receivables typically at 80% to 90%
- Lend furthest on earnings
- Private credit funds and BDCs, often in one unitranche loan
- Junior and flexible capital
- Mezzanine funds, SBICs and family offices
- Midas Partners's book
- 1,800+ lenders; 1,148 write term and private credit, 235 asset-based and lines
The map
| Lender type | Typical borrower | What they lend | Cost | How far they go |
|---|---|---|---|---|
| Community, regional and larger banks | Profitable companies with modest leverage needs, often in the bank's region | Term loans, revolving lines, real estate and equipment loans | Lowest | Coverage of at least 1.25x commonly; senior cash-flow loans commonly 2x to 3.5x EBITDA |
| Asset-based lenders | Companies with large receivables and inventory, including those with thin or uneven earnings | Revolving lines against a borrowing base, sometimes with term loans on equipment | Moderate, plus monitoring costs | Receivables typically at 80% to 90%; inventory up to 85% of net orderly liquidation value |
| Private credit funds and BDCs | Companies with steady earnings, often sponsor-backed, more often toward the larger end | Senior, stretch senior and unitranche loans | Higher, with call protection | Further than banks; unitranche lenders stretch past senior levels |
| Mezzanine funds and SBICs | Profitable companies that need more than a senior lender will give | Subordinated debt, often with warrants; some SBICs lend senior or unitranche | High, with equity upside | Behind a senior lender, adding leverage the senior will not |
| Family offices | Deal by deal, often where they know the industry or the owner | Anything from senior loans to preferred equity | Wide range | Flexible; depends on the family's appetite |
| Insurance companies | Mostly the upper end of the range and above, with long, stable histories | Long-term fixed-rate notes, directly or through affiliated funds | Moderate for fixed, long money | Conservative senior levels, or junior capital through affiliated funds |
The rows overlap. A regional bank can run an asset-based lending group; a private credit fund can hold an SBIC license; an insurance company can own a mezzanine fund. The type is a guide to how a lender thinks, not a fixed box.
One kind of lender is missing from the map on purpose. A company in the lower middle market has usually outgrown SBA lending: 7(a) loans go up to $5 million, which is often less than a refinancing, a recapitalization or an acquisition at this size needs, and the program's rules on guarantees and seller notes rarely suit a company with outside investors or a sponsor.
How each type thinks
Banks lend against cash flow, collateral and the owners, in that order, and they price low because they are funded by deposits and regulated to stay safe. They want coverage, amortization from the start, financial covenants and, often, the company's deposit accounts. Many ask the owners of a closely held company for a personal guarantee. They are the right first call for a profitable company with modest leverage needs. Where banks differ from each other is appetite: some favor certain industries, some cap loan size or hold only part of a larger loan, and some want only borrowers in their footprint. Community vs national banks covers the difference in practice.
Asset-based lenders care about what they could collect if the business stopped. They lend a percentage of eligible receivables and inventory, test it constantly through borrowing base certificates and field exams, and are less concerned with a bad year of earnings. That makes them the natural lender for a growing distributor, a manufacturer with seasonal swings or a company recovering from a loss. Bank vs non-bank ABL covers the two kinds, and how a borrowing base works covers the mechanics.
Private credit funds and BDCs lend investors' money, not deposits, and price for higher returns. A business development company is a regulated fund structure, often publicly traded, that lends to private companies. Both look for durable earnings and an owner or sponsor with money at risk, and in return lend further, with lighter amortization, in one loan. Private credit pricing explains what they charge and why, and senior debt vs unitranche compares their main product with a bank loan.
Mezzanine funds and SBICs take the layer between senior debt and equity. They price with cash interest, often PIK interest and warrants, and sit behind the senior lender under an intercreditor agreement. An SBIC is a private fund licensed by SBA that adds SBA-backed borrowing to its own capital; it can back only companies that meet SBA's size standards. Mezzanine debt and SBIC funds cover each.
Family offices invest a family's own wealth, can move outside standard boxes and often want a relationship as much as a return; see family office direct lending. Insurance companies need long, predictable income to match their policy obligations, so they favor long-dated fixed-rate loans to stable, larger companies, and reach the lower middle market mainly through affiliated funds.
Midas Partners's lender book, by what lenders write
Midas Partners's lender book holds 1,800+ lenders. Many write more than one kind of credit, so the counts below overlap.
| Kind of credit | Lenders in the book |
|---|---|
| Term and private credit | 1,148 |
| Asset-based and lines | 235 |
The size of each group matters less than its spread. Within term and private credit alone there are lenders that stop well short of the larger deals and lenders that will not look at anything smaller, lenders that avoid whole industries and lenders that specialize in them. Lenders that fit see a blind teaser first, and the client approves each lender by name before it learns who the client is. The lender book describes how it is organized.
Choosing whom to approach is a structuring decision
Owners often think of lenders as interchangeable sources of the same product, to be compared on rate. They are not. The lenders you approach decide the structure you end up with:
- Approach only banks, and the debt is capped at what a bank will lend, often with a personal guarantee. If that is not enough, the deal stalls rather than finding a second layer.
- Approach only private credit funds, and a business that qualified for bank pricing may pay a fund's rate and call protection for leverage it did not need.
- Approach a senior lender alone for a deal that needs more than senior capacity, and the gap comes back as a request for more equity, late in the process.
- Approach an asset-based lender for a service business with few receivables, and the borrowing base will be small no matter how profitable the company is.
The better sequence starts with the structure: how much debt the cash flow and assets support, what the owners will and will not sign, what a seller needs if there is one, and what the business plans next. That points to one or two lender types, and then to the specific lenders within them whose appetite matches the industry, size and situation. The comparison that matters is between lenders who can all say yes, on the same package. Using a debt advisor vs going direct covers when that work is worth delegating.
A deal shown to the wrong lenders is not just slower. It can come back with the wrong structure, from a lender that was never the right fit.
Matching the lender to the situation
| Situation | Lender types to start with |
|---|---|
| Profitable company refinancing or expanding, modest leverage | Community, regional and larger banks |
| Distributor or manufacturer with large receivables and uneven earnings | Asset-based lenders |
| Acquisition that needs more than senior leverage | Private credit funds and BDCs for a unitranche, or a bank with a mezzanine fund or SBIC behind it |
| Dividend recapitalization or partner buyout | Banks within senior capacity; private credit funds for more |
| Owners want no personal guarantee | Private credit funds, mostly for larger or sponsor-backed companies |
| Growth capital beyond senior capacity | Mezzanine funds or SBICs behind a bank |
| Long-dated fixed-rate debt for a stable, larger company | Insurance companies and their affiliated funds |
| Unusual situation that fits no box | Family offices |
As a company grows, its natural lenders change. A business that has borrowed from one bank for years can find that bank's hold limit or industry appetite is now the constraint, and move to a larger bank, a club of banks or a private credit fund when it needs acquisition capacity. Moving from a bank to private credit covers that step, and how much debt a business can carry shows how each type sizes a loan.
What every lender type will ask for
The documents overlap more than the lenders do. For a term loan, every type will want:
- P&L / income statement
- Year-to-date P&L through last month-end
- Balance sheet
- Debt schedule
- AP aging
Asset-based lenders add an AR aging by customer with days outstanding, the debt schedule with existing liens, and, where inventory is in the borrowing base, an inventory report; some ask for bank statements and two to three years of business tax returns. Acquisition lenders of every type want the target's latest full year of figures for every company being bought, never an older year, and the letter of intent.
Midas Partners builds one lender package, with a financing model, lender presentation, blind teaser and underwriting memo, in a day once the documents are in; by hand, the same package takes at least a week. Senior bankers run every engagement, software does the analyst work, and a senior banker checks every page before the client approves it. Midas Partners agrees its fee with the client in writing before anything goes to a lender. The package shows what lenders receive, and what we do covers the rest of the process.
Common questions
- Are banks always the cheapest lender?
- For the debt they are willing to make, usually. The catch is how much they will make and on what terms: personal guarantees, amortization and covenants. Where a bank will not go far enough, the cheapest overall structure may combine a bank with a junior lender rather than replace it.
- What is the difference between a BDC and a private credit fund?
- A business development company is a regulated fund structure, often publicly traded, that lends to private companies. A private credit fund raises money privately from investors. To a borrower they behave similarly: higher pricing than banks, more leverage, call protection.
- Do SBICs lend senior debt?
- Some do, but most provide subordinated or mezzanine debt, often with warrants, behind a bank. They are licensed by SBA and can back only companies that meet SBA's size standards.
- How many lenders should I approach?
- Enough of the right type to create real comparison, not every lender that might say yes. Showing a deal too widely can make it look shopped. Start from the structure the business needs and approach the lenders whose appetite fits it.
- Can I use more than one type of lender in the same deal?
- Yes, and larger deals often do: a bank or asset-based lender for the senior loan or revolver, with a mezzanine fund, an SBIC or a seller note behind it. The lenders then sign an intercreditor or subordination agreement.