6 min read
Key takeaways
- Private credit refers to non-bank capital solutions that offer startups flexibility and creative structuring, sometimes at higher cost and risk than traditional loans.
- It’s typically best suited for growth-stage, institutionally-backed companies raising capital alongside equity rounds or facing needs banks may not cover.
- Comparing private credit, venture debt and equity across cost, control and dilution, and evaluating lender reputation and terms can help inform founder decisions.
Startup founders face an array of financing choices—and the stakes can be high depending on type. As the private credit market has expanded—growing rapidly since 2008 when regulatory changes limited traditional bank lending—so have the options available to growth-stage, venture-backed companies looking to extend runway or reduce dilution without a full equity raise.
“A private credit provider is a broad term for any lender that typically hasn’t been a traditional commercial bank. For founders, it means more options—but also more to weigh when planning your next capital raise.”
Dan Maniaci
Co-Head of J.P. Morgan Technology & Disruptive Commerce Credit
Understanding how private credit fits alongside venture debt and equity—and what to look for in a lender—can help you evaluate how to extend runway and manage dilution.
For founders considering private credit, here’s an overview of how it works.
What is private credit for startups?
Private credit encompasses lending solutions that originate outside public markets—historically by non-bank institutions, though today some banks also maintain dedicated private credit capabilities. For growth-stage founders, the most relevant categories include:
- Direct lending: Loans structured at the senior level of a company’s capital stack, providing access to capital without going through traditional banks or public markets. Direct lending can support growth, acquisitions or other strategic needs.
- Venture debt: Runway-extension financing and additional liquidity provided alongside or shortly after an equity round.
- Asset-based lending: Loans secured by real estate, infrastructure, equipment or other tangible business assets. For startups with tangible assets, this can provide flexible capital backed by collateral.
The broader private credit landscape also includes categories less common for high-growth startups but worth understanding as context:
- Mezzanine, second lien debt and preferred equity: Financing that sits below senior debt in the capital structure. These instruments are generally unsecured and rank below senior loans for repayment in a default. They typically include equity-linked incentives—sometimes called kickers—that enhance lender returns while the instrument remains classified as debt.
- Distressed debt: Specialized investors step in when a company faces financial distress, supporting an operational turnaround or balance sheet restructuring. These transactions tend to increase during tighter credit markets.
- Special situations: Financing tied to unique corporate events—mergers and acquisitions, divestitures, spinoffs or capital raises—that create non-standard borrowing needs. These scenarios often call for significant customization and expertise from lenders.
Private credit vs. venture debt vs. equity financing: What’s the difference?
Capital options differ across cost, control and dilution. Venture debt is a subset of private credit, but because it’s the most common form for startups, it’s broken out separately here. The table below outlines typical characteristics:
Factor | Direct lending / private credit | Venture debt | |
|---|---|---|---|
Cost of capital | Higher interest, often includes warrants | Moderate interest, typically includes warrants | No interest, but gives up ownership |
Control/covenants | Strict covenants, lender can require board influence | Moderate covenants, less board control | Investors gain board seats, voting rights |
Dilution | Non-dilutive or minimally dilutive | Minimally dilutive (via warrants) | Highly dilutive—ownership stake sold |
Typical use case | Growth-stage or VC-backed companies; capex or runway extension | Runway extension, post-equity round | All stages, especially early-stage |
Risk profile | Some lenders may exercise acceleration rights in distress | Lenders generally offer more flexibility in distress | Investors share downside but influence strategy |
To illustrate how private credit can affect ownership, Maniaci offers a hypothetical: A founder raising $100 million entirely through equity at a $500 million valuation gives up 20% ownership. Raising $80 million in equity and supplementing with $20 million in non-dilutive debt reduces dilution to 16%—preserving more ownership but introducing covenants and interest payments.
When do startups typically use private credit?
Private credit is generally accessed by companies with institutional backing, such as venture capital or private equity. “It’s rare, but not impossible, for a private credit lender to finance a truly bootstrapped company. Most deals happen alongside or very close to an equity funding event,” Maniaci said. “The goal is to complement equity, not replace it.”
For companies with capital needs that extend beyond what traditional banks offer, private credit provides an alternative—though it may come with higher cost and additional risk. Some specialty lenders also support companies facing operational challenges or restructuring, although this is less common among high-growth startups.
Private credit lenders: factors for startup founders to consider
The following factors can affect both your capital structure and the long-term health of your business.
- Lender reputation: The track record of a lender and available references can provide useful insights into their reliability and reputation. “Founders should understand what the relationship looks like not just at onboarding but throughout the entire tenor,” Maniaci said.
- Scalability of capital: A lender’s ability to support your growth through additional funding rounds or upsizes matters. “It’s important to know if a lender can do $10 million today and $50 million tomorrow if needed,” Maniaci said.
- Terms and flexibility: Loan terms can be affected by future events—new funding rounds, milestone triggers or M&A activity. Discussing early how a lender responds to change can clarify expectations before those events occur.
- Lender diversification: Some companies choose to work with more than one lender to manage relationship and concentration considerations; appropriateness depends on circumstances. “Lenders can change strategy—they may exit venture, exit direct lending or scale back risk appetite,” Maniaci said. “It’s helpful to maintain multiple private credit lender relationships.”
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Contributors
Dan Maniaci
Co-Head of J.P. Morgan Technology & Disruptive Commerce Credit
JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/commercial-banking/legal-disclaimer for disclosures and disclaimers related to this content.
