UK mid-market borrowers now choose between three broad categories of capital providers (1) traditional clearing banks, (2) challenger banks, and (3) private direct lenders. Each sits in a different regulatory box, and that box shapes pricing, speed and structure. This article considers what each lender offers a mid-market borrower.

Traditional banks

Barclays, HSBC, Lloyds, NatWest and their peers are dual-regulated by the PRA (Prudential Regulatory Authority) and FCA (Financial Conduct Authority) under FSMA (Financial Services and Market Act 2000). Their regulatory framework also being reshaped by the Financial Services and Markets Act 2023 and the UK’s ‘Smarter Regulatory Framework’, which is replacing retained EU financial-services legislation with rules made principally by the PRA and FCA. Because banks operate balance sheets subject to prudential capital, liquidity and large-exposure requirements, the regulatory capital consumed by a loan is an important factor in pricing, leverage appetite and credit selection.

Upside for borrowers

Competitive pricing

For straightforward, lower-risk mid-market borrowers, banks tend to offer the lowest all-in cost of debt. Their funding model and ability to combine lending with broader relationship revenues can give them a significant pricing advantage.

One-stop shop

Cash management, trade finance, hedging and transaction banking (both national and international) come bundled in, often at relationship pricing.

Predictable paperwork

LMA (style) precedents dominate.  For lower value deals, these banks often have standard finance documents, many of which are not negotiable (which is also a downside).

Strong regulatory and resolution framework

Major banks operate within the PRA/FCA supervisory framework and the UK’s bank resolution regime. This generally provides a stronger institutional and regulatory framework than an individual private lending vehicle, although it does not guarantee the continued availability of an undrawn facility.

Room to grow

Syndication and loan distribution can allow banks to arrange larger transactions while distributing part of the resulting credit exposure across a wider lender group.

Potential Drawbacks

Appetite runs shallow fast

Basel 3.1 and existing prudential capital requirements can make banks more selective where lending consumes significant regulatory capital, particularly for higher-risk or higher-leverage exposures.

Covenant heavy by default

Maintenance covenants, reporting requirements and negative covenants remain common in mid-market bank lending, although the package varies significantly by leverage, sector, sponsor support and credit quality.

Slower execution and decision making

Credit committees, KYC/AML under the 2017 Money Laundering Regulations, and sanctions screening slow things down versus a single fund decision-maker.

Limited flex on structure

Banks generally operate within a narrower structural and regulatory framework. Unitranche, PIK, aggressive leverage and highly bespoke structures are more naturally accommodated by private credit, although banks can participate in more complex structures in appropriate circumstances.

 

Challenger Banks

Shawbrook, Aldermore, OakNorth, Close Brothers and similar banks are PRA/FCA-regulated deposit-takers. Some smaller domestic banks may qualify for the PRA’s Strong and Simple regime for Small Domestic Deposit Takers (SDDTs), which introduces proportionate prudential requirements while maintaining regulatory resilience.

Upside for borrowers

Quick to say yes

Shorter credit chains, and genuine appetite for asset classes bigger banks tend not to touch such as bridging finance, SME cash-flow lending, specialist buy-to-let.

Terms you can negotiate

Bilateral or club structures can give borrowers more direct access to the decision-maker and potentially greater flexibility when negotiating documentation.

Still a regulated counterparty

FSMA/PRA oversight gives borrowers and advisers a recognisable regulatory backstop rather than an unregulated fund vehicle.

Sector know-how

Deep specialism in healthcare, hospitality, real estate and similar niches translates into sharper, faster credit calls.

Potential drawbacks

Balance sheet ceilings

Smaller books mean they can’t write large tickets solo and feel funding-cost swings more acutely.

Pricing

Pricing often sits between relationship-bank and private-credit economics, although this varies materially by sector, leverage, collateral, transaction size and execution requirements.

Concentration limits bite harder

Smaller capital bases mean large-exposure rules cap ticket size and constrain follow-on capacity as a borrower scales.

Thin bench for complexity

Limited capacity for cross-border or heavily leveraged deals, and shallow secondary liquidity if a lender wants out.

 

Private direct credit

Private direct lenders are generally non-bank lenders and are not subject to the PRA’s bank prudential regime simply by virtue of making loans. The regulatory position depends on the structure of the lending vehicle and its manager. A UK-based manager may be subject to the UK AIFM regime, while certain overseas managers and funds may access UK investors or the UK market under the National Private Placement Regime (NPPR), where applicable.

It’s worth noting that a private credit financing tends to be the home of bespoke and complex structures.

Upside for borrowers

Fast and certain execution

One fund (or a small club) can commit and close without layers of committee sign-off, exactly what competitive M&A and take-privates need for “certain funds” commitments.

Structural flexibility

Unitranche, PIK features, acquisition facilities, portability, incremental facilities and bespoke covenant packages can often be accommodated more readily than in traditional bank lending.

Leverage capacity and fewer looser covenants

Free from CRR risk-weighting, direct lenders can underwrite higher leverage and complex cash-flow profiles, EBITDA adjustments and add-backs included. Lighter maintenance covenants and reporting obligations give a sponsor more headroom to execute a business plan without tripping defaults over short-term EBITDA dips.

One phone call, not a syndicate or credit committee

No information leakage across a lender group; just one credit decision-maker for waivers, amendments, and resets.

Particularly well suited to sponsor-backed businesses

Underwriting criteria and reporting line up naturally with how PE sponsors actually run their portfolio companies. Private credit funds are built around sponsor-owned, PE-backed businesses. Being able to deal with EBITDA add-backs, growth-stage cash flow profiles, add-on M&A.

Potential drawbacks

Cost of debt

Direct lending generally carries a meaningful premium to senior bank debt, reflecting higher leverage, greater structural flexibility, illiquidity and the lender’s required return. Pricing is highly transaction-specific and may include upfront, OID, ticking, exit or other fees.

Different regulatory and liquidity framework

A private credit vehicle is generally not subject to the same bank capital, liquidity and resolution framework as a deposit-taking institution. The relevant protections instead depend on the fund structure, manager, financing arrangements and contractual terms. Borrowers should therefore assess not only the lender’s credit underwriting but also its ability and obligation to fund future drawings, including under stressed conditions.

Documents get heavy

Often LMA leveraged precedent is the starting point, then substantially rewritten, plus real intercreditor complexity where unitranche first-out/last-out splits are in play.

Limited ancillary banking

Private credit lenders generally do not provide the full suite of cash management, trade finance and banking services available from a relationship bank, so borrowers often maintain a separate bank relationship alongside the debt facility.

Fund-level tripwires

Borrowers should also understand the lender’s own fund constraints, including investment-period limitations, concentration limits, key-person provisions, fund-life considerations and restrictions on follow-on commitments. These may become relevant when the borrower needs additional capital, an acquisition facility or a refinancing.

How we can help

Thomson Snell & Passmore’s Banking & Finance team has the depth and breadth of expertise to advise on all types of financing and funding arrangements. With expertise including secured lending structures, asset, project, acquisition and real estate finance, we have a track record of helping banks, lenders, borrowers and businesses to achieve their financial objectives.