Twenty years ago, a $15M-revenue manufacturer needing $2M called their bank, and the bank competed for the deal. Today that same call often gets a polite pass — while three private credit funds, two RBF platforms, and an ABL shop will fight over the file. Nothing about the manufacturer changed. What changed is who is allowed, and who is built, to hold that risk.
Why banks look the other way
It isn’t snobbery, and it mostly isn’t even judgment about your business. Three structural forces push banks out of the middle market:
1. Capital rules make your loan expensive for them to hold. After 2008, bank regulation (Basel III and its U.S. implementation) forced banks to hold more capital against riskier, less-standardized assets. A loan to a mid-sized private company with no rating and lumpy cash flow consumes far more regulatory capital than a mortgage or an investment-grade bond. Same dollars lent, worse return on capital — so the incentive is to lend those dollars elsewhere.
2. Your loan costs as much to underwrite as one ten times bigger. Underwriting a $2M credit takes roughly the same analyst hours, committee time, documentation, and annual review as a $20M credit. Banks solved this the rational way: raise minimums, standardize the box, and decline anything with a story. The middle market — too big for a credit-scored small-business product, too small and non-standard for the corporate desk — fell into the gap.
3. Deposits punish volatility. Banks lend against a deposit base that regulators (and depositors) expect to be safe. Every cycle of regional-bank stress makes examiners more sensitive about concentration in exactly the loans the middle market needs — asset-heavy, covenant-heavy, story-heavy credit.
None of this means your file is bad. It means your file is inefficient for a bank to own. Different thing entirely.
Why private credit runs toward the same file
Private credit funds, BDCs, and specialty finance companies lend investor capital, not deposits. That single difference cascades:
- No regulatory capital charge shaped like a bank’s. They hold what they underwrite, priced how they choose.
- Locked-up money. Their investors committed capital for years — no depositor can run. They can hold illiquid, non-standard loans to maturity because nobody can demand the money back Tuesday.
- Paid for complexity. A bank earns nothing extra for understanding your progress billings or seasonal inventory swing. A private lender charges for exactly that understanding — complexity is their margin, not their cost.
- Speed as product. Days-to-close is a competitive weapon when the alternative is a 60–90 day bank process. For time-sensitive middle-market needs — acquisitions, contract mobilizations, inventory windows — speed is the product.
The result: private credit has grown to roughly $1.7 trillion in assets, and in the middle market it is no longer the “alternative.” For any file with a story, it’s the market.
What this costs you — the honest part
Private capital is not banking with a friendlier smile. It’s a different bargain:
- Price. No deposit funding means a higher cost of funds, plus a return investors chose over bonds. Expect senior private credit meaningfully above bank pricing, and flow-based products above that. You are paying for yes, for speed, and for flexibility.
- Attention. Banks that barely knew you also barely watched you. Private lenders watch closely — reporting, field exams, account visibility. We wrote a separate, unvarnished piece on exactly how close that gets: what private capital asks of you once it’s in.
- Structure. Tighter covenants, shorter maturities, and remedies that trigger faster when things wobble.
The takeaway
The bank isn’t rejecting you; regulation and economics rejected your category, and an entire industry was built to catch it. Use that industry for what it’s genuinely best at — speed, flexibility, and yes on non-standard files — go in with open eyes about price and oversight, and keep your financials moving toward the day the cheapest shelf competes for you again.