Direct lending is the simplest form of credit: a lender agrees terms with a borrower and holds the loan. There is no underwriter placing the loan with investors, no rating agency and no public market price. The lender that negotiates the loan is the lender that funds it, collects it and, if necessary, enforces it.
The term is used most often for loans to middle-market companies, but the same model applies to real estate bridge loans, asset-based facilities, loans against investment portfolios and loans secured by contractual cash flows. All of these are covered in Loan types and focus areas.
How a direct loan differs from the alternatives
A borrower who needs debt capital usually has three broad options: a bank, the public markets or a direct lender.
| Feature | Bank loan | Bond or broadly distributed loan | Direct loan |
|---|---|---|---|
| Who decides | Bank credit committee, often with regulatory constraints | Arranger and many investors | The lender that will hold the loan |
| Who holds it | The bank, sometimes sold in part | Many investors; trades in a market | One lender or a small club |
| Pricing | Usually lowest for qualifying borrowers | Set by market demand | Usually higher, reflecting speed, flexibility and complexity |
| Flexibility | Limited by policy and regulation | Standardized | Negotiated to the borrower and collateral |
| Amendments | Possible, can be slow | Hard: many holders must consent | Direct conversation with one counterparty |
| Disclosure | Private | Ratings, offering documents, sometimes public reporting | Private |
The trade-off for a borrower is straightforward. A direct loan usually costs more than a bank loan to a borrower who fits the bank’s box. In exchange, the borrower gets a lender that can underwrite complexity, decide quickly, structure terms around the actual plan and amend the loan by talking to one counterparty rather than many.
Who the direct lenders are
The direct lending market is made up of several kinds of lenders, each with a different source of capital and a different set of constraints.
Banks. Banks still lend directly, especially to borrowers with stable cash flows and conventional collateral. Since 2008, capital rules and supervisory guidance have made many loans—higher-leverage corporate loans, transitional real estate, construction—more expensive for banks to hold. Many banks now lend to non-bank lenders instead, through warehouse and back-leverage facilities.
Business development companies (BDCs). BDCs are closed-end investment companies regulated under the Investment Company Act of 1940, often publicly traded, that lend mainly to US middle-market companies. They generally must distribute most of their taxable income and are subject to statutory limits on their own borrowing.
Private credit funds. Closed-end and evergreen vehicles managed by asset managers, raising capital from pension plans, endowments, insurers and wealthy individuals. Closed-end funds have an investment period and a fixed life, which shapes when they lend and when they need loans to be repaid.
Insurance companies. Insurers have long invested in private placements and increasingly in asset-based finance, matching long-dated liabilities with long-dated, often investment-grade, private assets.
Family offices and other principal lenders. Lenders investing their own capital, without outside investors. Their constraints are their own, which is why they can often be more flexible on timing and structure. Caldrion is one of these; we explain what that means in Lending from permanent capital.
Why borrowers choose a direct lender
Borrowers rarely come to a direct lender because it is the cheapest option. They come because something about their situation does not fit a standard box. In our experience, the reasons fall into a handful of patterns:
- Speed. An acquisition with a fixed closing date, a maturing loan or a lender pulling back. Certainty of execution can be worth more than a lower rate.
- Transition. An asset or business between states: a building in lease-up, a construction project near completion, a company growing faster than its earnings history, a turnaround with a credible plan.
- Complexity. Multiple entities, unusual collateral, a family transition, a portfolio of assets rather than one.
- Structure. A need for interest reserves, delayed-draw funding, payment-in-kind interest or an asset-based structure that a bank’s standard product does not offer.
- Relationship. A preference for one counterparty who will still be there, and still understand the loan, in two years.
The case studies on this site, written under project code names, show these patterns in real situations.
How the economics work
A direct loan is usually priced as a floating spread over a base rate—today, typically the Secured Overnight Financing Rate (SOFR)—plus fees. Our published pricing is SOFR + 600–900 bps, or a fixed-rate equivalent, with an origination fee of 1–2%. Floors, original issue discount, exit fees and call protection may also form part of the economics. Each is explained in Pricing, fees and OID and Amortization, call protection, PIK and interest reserves.
Illustrative arithmetic. Assume a $20M loan at SOFR + 700 bps with SOFR at 4.00%, so a coupon of 11.00%, and a 1.5% origination fee. Annual interest is $2.2M. The $300,000 fee, spread over an expected two-year life, adds about 0.75% per year, for an all-in yield of roughly 11.75% before any other fees. These numbers are illustrative, not a quote.
What a direct lender expects in return
Because a direct lender holds the loan and carries the risk to maturity, it expects a closer relationship than a bond investor would. That usually means:
- Information. Regular financial and collateral reporting, sized to the loan and the asset. See servicing and reporting.
- Covenants. Tests that give early warning when a plan drifts. See Covenants explained.
- Collateral. A perfected security interest in the assets that support the loan. See Collateral, security and guarantees.
- Candor. Early notice when something changes. Most problems in a direct loan are solvable if they are raised early; few are if they are concealed.
Red flags in a direct lending relationship
From the borrower’s side, it is worth asking a few questions of any direct lender before signing a term sheet:
- Does the lender have the capital on hand, or does it need to raise or arrange it?
- Will the lender hold the loan, or sell it after closing?
- Who decides, and how many approvals stand between the term sheet and funding?
- Who will service the loan, and will the borrower deal with the same people after closing?
- What happens if the plan needs more time?
We answer those questions for ourselves on our process page and in Working with Caldrion.
This entry is general information as of November 2026, not investment, legal or tax advice, and not an offer of securities.