A private credit fund with a $10M minimum check declines far more good companies than bad ones. The declines are not credit decisions. They are portfolio construction decisions, and the borrower on the other end almost never understands the difference.
Why do funds have a minimum check size?
Because the cost of underwriting, documenting, and monitoring a position is broadly similar whether the position is $3M or $30M, while the fee and interest income scale with size. A fund with a fixed team and a target position count cannot deploy its capital in small increments and still cover the work.
There is a second reason, less often stated: a fund with 25 positions can be actively managed, and a fund with 200 cannot. The minimum is as much about attention as it is about economics.
What does that mean for a $3M borrower?
It means a decline that carries no information about the company. A business with clean receivables, a defensible margin, and a real growth case can be declined by six funds in a row purely on size, and will reasonably conclude the market has judged it. It hasn’t. The market never looked.
This is the population that ends up in the wrong capital, because the fastest responses to a small request tend to come from the most expensive products. The arithmetic on that outcome is in revenue-based financing.
Where does sub-minimum capital actually come from?
| Source | Typical range | What it underwrites |
|---|---|---|
| Asset-based lenders and factors | $250K to $10M | Receivables, inventory, equipment |
| Small-balance mezzanine and sub-debt | $1M to $5M | Cash flow, with a senior lender ahead |
| Bank facilities with a guarantee | Varies | The relationship and the guarantee |
| Bridge and gap capital | $500K to $5M | A defined event with a defined exit |
The structural point: below the fund minimum, the capital available is usually collateral-underwritten rather than cash-flow-underwritten. That changes what the borrower must be able to prove, which is the distinction laid out in cash flow lending vs asset-based lending, and the sizing question for a subordinated layer is covered in mezzanine below the minimum check.
Why should a large fund care where they go?
Because the borrowers below your minimum today are the borrowers at your minimum in three years, and the path between those two points determines whether they arrive financeable.
A company that spends two years in a well-structured asset-based facility arrives with clean reporting, a documented borrowing base, a field exam history, and a lender reference. A company that spends the same two years in stacked short-term advances arrives with a damaged cash-flow profile and a bank statement history that will be read closely. Same company, two different files, and the fork happened at the moment of a decline that took four minutes.
What does a good graduation path look like?
Three things need to be true, and they should be written down at the time of the decline rather than assumed.
- A structure that fits today, sized off the assets the company actually has rather than the earnings it hopes to have.
- Reporting discipline a larger lender will recognise, which usually means monthly borrowing base certificates, a maintained debt schedule, and a proper monthly close.
- A stated trigger for the step up, expressed as a number rather than a feeling: an EBITDA level, a facility size, or a leverage ratio at which the fund would take another look.
How should a fund handle the decline itself?
Say the real reason. A borrower told “you are below our minimum, here is roughly what a facility your size looks like, and here is the number at which we would look again” is a borrower who comes back. A borrower told “it wasn’t a fit for us” concludes something about their business that isn’t true, and acts on it.
The referral itself costs nothing and takes one paragraph. What it buys is a proprietary pipeline of companies that already know your name at the moment they cross your minimum.
The short version
A minimum check size is a portfolio decision that the borrower experiences as a credit verdict. Naming the real reason, pointing at capital that fits, and stating the number that would bring them back converts a decline into a future origination, at the cost of one honest paragraph.