Over the last decade, private credit has quietly become one of the biggest funding sources for small and midsize businesses.
For many companies, it solved a real problem:
- Faster access to capital
- Flexible structures
- Funding traditional banks would not provide
On the surface, it looked like a major improvement in business financing.
But the rapid growth of private credit is starting to expose risks that many business owners and SMB lenders may not fully appreciate.
And that is why I am increasingly concerned about private credit risks.
What Private Credit Actually Is
Private credit refers to lending by non-bank institutions:
- Private funds
- BDCs
- Specialty finance firms
After the 2008 financial crisis, banks became more conservative with lending.
Private credit stepped in to fill the gap.
Today, the market is estimated to manage trillions of dollars globally and plays a major role in financing SMB growth, acquisitions, and rollups.
Why Businesses Turned to Private Credit
For many SMBs, private credit offered:
- Faster approvals
- Larger loan amounts
- Flexible underwriting
I have seen companies secure funding through private lenders that traditional banks would never approve.
In some cases, that capital helped businesses scale aggressively.
But flexibility often came with:
- Higher interest rates
- Weak covenant structures
- Optimistic growth assumptions
And that is where the risk begins.
The Incentive Problem
One of my biggest concerns is the incentive structure inside the private credit industry.
Managers are often rewarded for:
- Growing assets under management
- Deploying more capital
- Increasing fee generation
That creates pressure to keep lending.
The problem is simple:
When the priority becomes putting money to work quickly, underwriting discipline can weaken.
The Warning Signs
Several trends are difficult to ignore.
Rising Exposure to Weak Borrowers
Many companies receiving private credit financing already have:
- Negative cash flow
- Heavy leverage
- Limited margin for error
If growth slows, debt service becomes difficult very quickly.
Opaque Valuations
Unlike public markets, many private credit positions are valued internally.
That makes it difficult to fully assess:
- Credit quality
- Portfolio risk
- Real exposure levels
Transparency matters, especially during stressed markets.
Technology and AI Disruption
Some portfolios are heavily concentrated in SaaS and technology companies.
If AI significantly disrupts parts of those sectors, revenue assumptions could weaken rapidly.
That creates additional pressure on already leveraged businesses.
Stress Signals Already Emerging
We are starting to see early indicators of strain:
- Increased redemption requests from major funds
- Higher concerns around default rates
- Cases involving fraud allegations and weak diligence
These are not isolated concerns anymore.
They suggest the market may be entering a tougher phase.
Why This Matters for SMB Lenders
Even without a major financial crisis, tighter private credit conditions could directly impact SMB financing.
Businesses that relied on easy capital may suddenly face:
- Refinancing challenges
- Higher borrowing costs
- Reduced liquidity
That pressure often shows up late, when options are already limited.
The Opportunity for Relationship-Driven Lending
This environment may also create opportunity.
SMB lenders focused on:
- Real cash flow
- Transparent underwriting
- Relationship-based lending
could become far more valuable as trust and discipline matter again.
Fast capital is attractive during expansion cycles.
Reliable capital matters during difficult ones.
Final Thoughts
I do not believe we are automatically heading toward another 2008-style collapse.
But I do believe the weaknesses inside parts of the private credit market are becoming harder to ignore.
Aggressive underwriting, weak transparency, and incentive-driven lending models create risk when conditions tighten.
For SMBs and lenders alike, this is a reminder that not all capital is equal.
The quality of the structure matters just as much as access to the money.
