Direct lending in the UK and Europe

Why companies choose direct lending over bank credit, what alternative credit looks like in practice, and how the European landscape is evolving.

Direct lending — where a non-bank lender provides a loan directly to a company, without syndication or intermediation by a bank — has grown from a niche corner of European finance into one of the primary ways mid-market companies fund acquisitions, growth, and refinancing. For businesses in the UK and across Europe, understanding what direct lending is, how it works, and why companies choose it over traditional bank credit is increasingly practical knowledge.

What is direct lending?

Direct lending is a form of private credit where a fund or lending institution originates a loan to a company and holds that loan on its own balance sheet. There is no bank arranging a syndicate, no bond market distribution, and no secondary trading. The lender underwrites the deal, funds it, and manages it through to maturity.

The loans are typically senior secured — backed by the borrower's assets and sitting at the top of the capital structure — and held to maturity rather than traded. This creates a direct, ongoing relationship between borrower and lender that persists for the life of the facility.

In the European market, direct lending is provided by dedicated credit funds, specialist lending platforms, and in some cases by insurance companies or pension funds deploying capital through managed accounts. The common thread is that the capital comes from institutional investors rather than from bank deposits, and the lending process is built around bespoke underwriting rather than standardised bank products.

Why do companies choose direct lending over bank credit?

Companies that have experience with both bank lending and direct lending tend to cite a consistent set of reasons for choosing the latter. These are not abstract advantages; they show up in how a financing process actually runs.

Speed. A direct lender can move from initial discussion to term sheet and funding on timelines that are materially shorter than a typical bank process. Because the lender is deploying its own committed capital — not arranging a syndicate or seeking internal approvals across multiple committees — the decision chain is shorter. For borrowers on acquisition timelines or facing refinancing deadlines, this speed is often the decisive factor.

Certainty. A direct lender that issues a term sheet has already decided to lend. The capital is committed. In a bank syndication, the arranging bank may issue a term sheet but still need to syndicate the loan to other banks, introducing the risk that the syndication fails or that terms shift during the process. For a company that needs to know its financing is done, direct lending provides a degree of certainty that syndicated processes often cannot match.

Flexibility. Direct lenders can structure loans around the specifics of a transaction in ways that standardised bank products cannot. Tailored amortisation schedules, bespoke covenant packages, creative collateral structures, and deal-specific terms are all standard practice. The lender and borrower negotiate a facility that fits the business, rather than fitting the business into a pre-existing product template.

Relationship. Because the lender holds the loan to maturity, the borrower deals with the same team from origination through servicing. If the business needs a waiver, an amendment, or a conversation about changing circumstances, the counterparty is the same institution that underwrote the deal. There is no need to negotiate with a dispersed syndicate of banks that may have different views and different incentives.

Complexity tolerance. Some transactions are too complex, too small, or too unusual for a standardised bank credit process. Multi-jurisdictional structures, unusual asset bases, businesses in transition, and sectors that banks have pulled back from are all areas where direct lenders have established a presence specifically because they are willing and able to do the underwriting work that these deals require.

What does alternative credit look like in practice?

Alternative credit is a broad term that encompasses any non-bank source of debt financing. Direct lending is the largest and most established segment, but the alternative credit landscape includes several other forms.

Unitranche. A single facility that combines senior and subordinated debt into one loan with a blended interest rate. The borrower deals with one lender and one set of documents, which simplifies the process. Behind the scenes, the lender may split the economics between a senior and a junior tranche, but the borrower sees a single facility.

Mezzanine. Subordinated debt that sits below senior secured lending in the capital structure. Mezzanine is higher risk for the lender and carries a higher interest rate, sometimes with equity-linked features such as warrants. It is used to bridge the gap between senior debt capacity and the total capital a transaction requires.

Asset-based lending. Facilities secured specifically against receivables, inventory, or other current assets, with borrowing capacity that fluctuates with the value of the underlying collateral. Asset-based lending is common for businesses with substantial working capital needs.

Specialty finance. Lending against specific asset classes — trade receivables, real estate, equipment, intellectual property — where the underwriting is driven primarily by the quality and liquidity of the collateral rather than by the borrower's enterprise value.

For many mid-market companies, the relevant choice is between a traditional bank facility and a direct lending facility. The other forms of alternative credit tend to serve specific situations or fill specific gaps in the capital structure rather than functioning as direct substitutes for a primary senior lending relationship.

What are typical direct lending terms and processes?

While every direct lending transaction is bespoke, there are common characteristics that borrowers can expect.

Facility size. European direct lenders typically focus on mid-market transactions. Individual facility sizes vary widely, but the core of the market sits in the range of single-digit millions to low hundreds of millions in euros or sterling. Larger transactions may be held by a single fund or shared between a small club of lenders.

Tenor. Loan maturities are typically three to seven years, depending on the purpose of the facility and the characteristics of the borrower. Acquisition finance tends towards the longer end; bridge facilities and working capital lines tend to be shorter.

Pricing. Direct lending is generally priced at a spread over a reference rate (SONIA in the UK, EURIBOR in the eurozone). The spread reflects the credit risk of the borrower, the quality of the security package, and the structure of the facility. Pricing is higher than a comparable bank facility would be — the borrower is paying for speed, certainty, flexibility, and the ability to hold the loan without syndication.

Security. Most direct lending is senior secured. The borrower grants a first-priority security interest in its assets — which may include property, equipment, receivables, shares in subsidiaries, or the business as a whole. The scope and strength of the security package is a core part of the negotiation.

Covenants. Direct lending facilities include financial and operational covenants. Financial covenants typically include leverage ratios (debt relative to earnings), interest or debt service coverage ratios, and sometimes minimum liquidity thresholds. Operational covenants restrict the borrower from taking certain actions — making acquisitions, incurring additional debt, paying dividends — without lender consent. Covenant packages in direct lending are often more tailored than those in bank facilities, reflecting the bespoke nature of the underwriting.

Process timeline. A typical direct lending process from first meeting to funding can take four to twelve weeks, depending on complexity. The early stage involves the lender understanding the business, its financials, and the proposed use of proceeds. If there is a fit, the lender issues a term sheet. Due diligence, legal documentation, and security registration follow. For simpler transactions, the process can be materially faster.

How is the UK and European direct lending landscape evolving?

The growth of direct lending in Europe over the past decade has been substantial. Several structural forces have driven it and continue to shape the market.

Bank retreat from mid-market lending. Since the 2008 financial crisis, regulatory changes — higher capital requirements, stricter risk weighting, and more demanding supervisory expectations — have made it less economically attractive for banks to lend to mid-market companies, particularly on bespoke or complex terms. Direct lenders, not subject to the same regulatory capital framework, have filled much of the space that banks have vacated.

Institutional appetite for yield. Pension funds, insurance companies, and other institutional investors have allocated increasing amounts of capital to private credit as they seek returns above those available in public fixed-income markets. This has provided direct lending funds with substantial and growing capital bases, enabling them to take on larger and more complex transactions.

Broadening geographies. Direct lending began primarily as a US and UK phenomenon. It has since expanded substantially across continental Europe — the Nordics, Germany, France, Benelux, and Southern Europe have all seen significant growth in direct lending activity. Local market knowledge matters in cross-border lending, and the most effective direct lenders combine institutional capital with on-the-ground origination expertise in the geographies they serve.

Product evolution. The market has matured beyond simple term loans. Direct lenders now provide acquisition finance, revolving facilities, delayed-draw term loans, unitranche structures, and multi-currency facilities. The product range available from direct lenders increasingly matches what was historically available only from banks, but with the speed, flexibility, and certainty advantages that define direct lending.

Increasing sophistication of borrowers. As direct lending has become more established, borrowers have become more comfortable with it. Companies that might have considered only bank financing a decade ago now routinely include direct lenders in their financing processes. Advisers and intermediaries have developed expertise in structuring and placing direct lending facilities, which has further lowered barriers.

The trajectory is clear: direct lending is not a temporary phenomenon or a gap-filler waiting for banks to return. It is a permanent and growing part of how European companies access private capital, and it will continue to evolve as the market matures.