A community or regional relationship bank fits when the loan is within what it can hold, the leverage is conventional and the file needs judgment from people who know the market. A larger national bank fits when the company needs size, several states' worth of treasury services, an asset-based group or hedging, and its numbers fit a central credit policy. Private credit fits when the company needs more leverage or flexibility than either bank will give, at a higher price. Many companies this size do best showing the same file to all three.
- Who approves the loan
- Relationship bank: a committee close to the borrower. National bank: central credit officers. Private credit: the fund's investment committee
- How much one bank can lend
- Capped by law at a share of the bank's capital; most banks set a lower house limit
- How far they lend
- Banks commonly within senior cash-flow norms of 2x to 3.5x EBITDA; private credit stretches further
- What they want beside the loan
- Banks: your operating accounts. Private credit: usually nothing beyond the loan
- Price
- Banks lowest on rate; private credit higher, for more leverage and flexibility
Three kinds of lender, one company
Owners often frame the choice as community bank against national bank, because that is the choice they faced when the company was smaller. By the time a company has $10M to $100M+ in revenue, the useful frame is wider. Three kinds of lender compete for the same senior loan: relationship banks (community and regional banks that lend in their market and want the whole banking relationship), larger national banks with commercial and middle-market lending groups, and private credit funds that lend from investors' capital rather than deposits. The lenders in the lower middle market sets out the whole field.
Each decides differently, holds different amounts and draws its lines in different places. None is best for every loan. The right one depends on how much the company needs, how far above conventional bank leverage that is, what the collateral looks like and how much flexibility the business will need if a year goes wrong.
A relationship bank asks whether it believes this borrower. A national bank asks whether this borrower fits the policy. A private credit fund asks what the business is worth and what it will be paid for the risk. Your file needs to answer the question being asked.
Side by side
| Factor | Relationship bank | National bank | Private credit fund |
|---|---|---|---|
| Who decides | Loan committee close to the market, often with senior management | Central credit officers applying bank-wide policy | The fund's investment committee |
| How much it can hold | Limited by a smaller capital base; larger loans shared through participations | Rarely the binding constraint for a lower-middle-market loan | Set by fund size and policy; larger loans shared among funds |
| Leverage | Conventional senior levels; conservative on acquisitions | Conventional senior levels, set by policy | Further than banks, including unitranche |
| Room for judgment | More: can weigh a one-off year or a long relationship | Less: exceptions need escalation | Flexible on structure; strict on value and equity beneath the loan |
| Covenants | Often simpler; sometimes tested annually | Standard packages, usually tested quarterly | Usually a leverage and a coverage test against the fund's model |
| Deposits | Usually expected, often a condition of the loan | Expected, with treasury services priced into the relationship | Not required |
| Products | Term loans, revolvers, real estate, equipment | Adds asset-based lending, treasury, hedging, foreign exchange, syndication | Term loans, unitranche, delayed-draw; revolver often from a bank alongside |
| Price | Low rate, relationship-driven | Low rate on clean credits | Higher rate, often with call protection |
| When things go wrong | The same people often stay involved | Troubled loans usually move to a workout group | The fund negotiates directly; amendments cost money but are common |
Relationship banks: judgment, with a ceiling
At a community or regional bank, the lender who meets the owner usually presents the loan to a committee that sits in the same region, often including the bank's senior officers. They know the local economy, the property being pledged and sometimes the customers. A credit memo explaining that the business lost money in one year because of a one-time lawsuit, and has been profitable since, is read by people who can ask the owner about it directly. They are more likely to accept a customer concentration when they know the customer, and to structure around a long history with the bank.
The ceiling is capital. Every bank is limited by law in how much it can lend to one borrower, measured as a share of its own capital and surplus, and related borrowers are often counted together. Most banks also set a lower house limit. A relationship bank that likes the file may still say the loan is too big for it alone, and answer with a participation: it makes the whole loan, keeps the piece it can hold and sells the rest to other banks. The borrower deals with one bank, but the participants must approve the credit, and later amendments or waivers may need their consent. If one participant is cautious about the industry, the terms can tighten to suit the most conservative bank in the group.
Growth plans matter here. A company planning add-on acquisitions, or a revolver that will grow with receivables, can outgrow a relationship bank within a few years. Their capacity in specialized lending is also thinner: few have the field-exam and collateral-monitoring staff to run a true asset-based loan against inventory. They tend to ask for personal guarantees broadly, and their appetite follows the local economy and the bank's own concentrations.
National banks: capacity and products, inside a policy box
At a national bank, the relationship manager who meets the owner is usually not the person who approves the loan. The file goes to a credit officer in a separate reporting line, who applies a policy written centrally. That policy sets maximum leverage, minimum coverage, industry limits and which exceptions need higher sign-off. Conventional bank lenders commonly look for debt service coverage of at least 1.25x. Companies near the boundary between a bank's business-banking and middle-market segments should ask which one will handle them, because the underwriting and the relationship differ.
Scale and breadth are the advantages. A national bank can hold a sizable term loan and revolver on its own and syndicate a larger one. It usually has specialized groups for asset-based lending, equipment, real estate and particular industries, plus treasury management, foreign exchange and interest-rate hedging. A company operating across several states, collecting nationally or buying abroad will often find the national bank has more of what it needs under one roof.
The trade is a stricter box. Industries the bank has decided to limit may be declined outright. Covenant packages are standard and tested on schedule. When conditions change, decisions about a whole segment are made centrally, and a company can find its line reduced or not renewed for reasons that have little to do with its own results; see when your bank won't renew your line.
Private credit: when the bank's answer is not enough
Banks of both kinds stop at their leverage limits. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and banks tend to sit within that range, often toward its lower end on acquisitions. When the company needs more, for an acquisition, a recapitalization or a partner buyout, private credit funds lend further, often in a single stretch senior or unitranche loan. They also lend where a bank's policy says no: an industry the bank has limited, a year of uneven results, or a structure the bank's box does not allow.
The price is higher, and early repayment usually costs a premium in the first years. Private credit lenders do not want the deposits, which means the company keeps its operating accounts at a bank, and the revolver often comes from a bank alongside the fund's term loan. How that revolver sits against the term loan decides who controls the collateral in a bad year. See moving from a bank loan to private credit.
Deposits and the whole relationship
Both kinds of bank expect the operating accounts. For a relationship bank, deposits are its main source of funding, so moving the company's accounts is often a condition of the loan, and some banks price the loan off the depth of the relationship. A national bank also wants the accounts, but earns more from treasury services, card programs and payroll, and may price the loan partly on those. Splitting the loan from the operating accounts is harder than owners expect, so ask early what the bank will require. A bank that holds both the loan and the cash also has leverage in a dispute, so read the setoff and cash dominion provisions before signing.
Matching the lender to the loan
| Situation | Usually the better first call | Why |
|---|---|---|
| Conventional term loan and revolver, local collateral | Relationship bank | Local knowledge, simple structure, judgment on the owner |
| A file with a one-off weak year | Relationship bank, then private credit | A committee that can hear the explanation; a fund if the bank still says no |
| Loan above a smaller bank's house limit | National or large regional bank | Can hold the loan without participants |
| Revolver against receivables and inventory | A bank's asset-based group, or a non-bank asset-based lender | Field exams and collateral monitoring |
| Multi-state operations, hedging, treasury needs | National bank | Products under one roof |
| Acquisition or recap above senior bank leverage | Private credit, alone or beside a bank revolver | Banks stop at their leverage limits |
A receivables-heavy business may do better with a non-bank asset-based lender; see bank vs non-bank ABL. And a company moving its loans should expect a full underwriting and new documents; see moving your loans to a different bank.
How Midas Partners approaches it
Midas Partners's lender book holds 1,800+ lenders: 1,148 write term and private credit and 235 write asset-based loans and lines, across relationship banks, national banks and funds. Lenders that fit see a blind teaser first, and the owner approves each lender by name before it learns who the company is, so a relationship bank's flexibility, a larger bank's capacity and a fund's leverage can be compared on paper for the same loan.
What makes that possible is a file each kind of lender can use: a financing model that shows coverage and leverage, a lender presentation that explains the business and any one-off events, and an underwriting memo that anticipates the credit officer's questions. Once the documents are in, Midas Partners builds that package in a day, and a senior banker checks every page. See what goes in the package and how we underwrite.
Common questions
- Do community banks charge more than national banks?
- Not necessarily. Pricing depends on the credit, the collateral and the depth of the relationship more than the bank's size. A relationship bank may price a well-secured loan competitively to win the deposits, while a national bank may price lower on a larger, cleaner credit. Compare the whole offer, including fees, covenants and deposit requirements.
- What is a bank's legal lending limit?
- The most a bank may lend to one borrower, set by law as a share of the bank's capital and surplus, with related borrowers often counted together. Most banks set a lower internal house limit. When a loan exceeds what a bank will hold, it may sell participations to other banks or decline.
- What is a loan participation, and does it affect me?
- The lead bank makes the whole loan and sells pieces of it to other banks. You deal only with the lead bank, but participants must approve the credit, and later changes may need their consent. That can make amendments and waivers slower and more conservative.
- When does private credit make sense over a bank?
- When the company needs more debt than a bank will lend, needs a structure or flexibility a bank's policy does not allow, or has been declined for reasons of policy rather than credit. It costs more, so the comparison should be on the whole cost of the capital raised, not on rate alone.
- Can a relationship bank finance an acquisition?
- Yes, where the loan fits its house limit and leverage policy. Larger acquisitions, or those that need leverage beyond a bank's comfort, usually add a private credit lender or move to one entirely, often with a bank still providing the revolver.