Private credit: financing an SME acquisition when the bank retreats

Financing an SME buyout with a debt fund when the bank steps back

Introduction: when the bank steps back, who finances your SME buyout?

You have a target, a price, a timeline. What remains is the financing. And the bank, this time, hesitates: leverage deemed too high, cyclical sector, a buyout file that falls outside its grids. For some years now, an answer has established itself alongside bank credit, private credit: specialised funds that lend directly to companies to finance an acquisition, a LBO or a build-up. The global private credit market exceeded 2,000 billion dollars in 2025, and it keeps growing as banks retreat from leveraged financing of SMEs.

« The development of private debt is reshaping the credit landscape and the financing of companies. », Banque de France.

Three forces converge in 2026. First, the finalisation of Basel III raises the capital banks must set aside on leveraged loans, so they extend fewer of them. Second, debt funds have raised record amounts and are seeking to deploy them, often in the mid-market where SMEs operate. Third, sellers want execution certainty, and a fund that decides quickly is sometimes worth more than a bank pool that drags on. This article defines private credit, retraces its origin, explains why and how to use it, details its toolbox, says when to trigger it, exposes the Swiss withholding-tax trap, then delivers advantages, limits, five mistakes, two figured franco-Swiss cases and ten key questions.

Structure your acquisition financing before you sign

Before launching a buyout, have your financing plan framed by an independent third party that genuinely compares private credit, bank debt and mixed solutions. Book thirty minutes with Hectelion to structure your operation. Our financial structuring service builds the arrangement that holds the leverage, the debt service and the cash, ahead of signing.

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Before diving into the detail, note that Hectelion has developed Acontos, an online tool for audit, due diligence and business valuation, powered by Claude Sonnet 5 artificial intelligence by Anthropic and calibrated by Hectelion's methodology. From your accounts, it produces a first estimate of the value of your shares in a few minutes, free of charge and without keeping any document.

Launch the valuation simulator to obtain an order of magnitude, then read on to understand the drivers behind it.

Definition: what is private credit?

Private credit refers to debt financing granted directly by specialised funds, outside the classic banking circuit and the listed bond markets. A debt fund collects money from institutional investors, then lends it to unlisted companies, most often to finance an acquisition, an LBO, a build-up or a recapitalisation. Unlike a bank loan, the lender is not a deposit bank but an asset manager, which changes everything: higher risk appetite, higher leverage, tailor-made structuring, but a higher cost and its own return requirements.

This debt takes several forms, from unitranche debt to mezzanine, through direct senior debt. The common thread: a direct dialogue between the borrower and one or a few lenders, without the intermediation of a broad banking syndicate. For an owner, private credit is neither a fallback nor a miracle, it is one more tool in the financing plan of a buyout, to be coldly compared with bank credit.

Origin: from the banks' margin to a fully-fledged asset class

Private credit was not born yesterday, but it has changed scale. After the 2008 financial crisis, banks reduced their exposure to leveraged financing under regulatory pressure, and a gap opened in the financing of SMEs and buyout operations. Funds, often backed by private equity houses, rushed into it by lending directly, first in the United States, then in Europe. What was a niche financing became an institutional asset class, with its dedicated managers, its standards and its trillions under management.

In continental Europe, and particularly in France and Switzerland, the movement is more recent but real. The finalisation of the Basel III framework, which raises the capital cost of risky loans for banks, accelerates the shift of part of acquisition financing towards debt funds. The Banque de France itself documents this reshaping of the credit landscape. For franco-Swiss SMEs, this means one thing: an additional source of financing, provided its codes and traps are mastered.

Why finance an acquisition with private credit

First, leverage. A debt fund often accepts higher indebtedness than a bank, sometimes 4 to 5 times EBITDA when the bank stops at 2.5 or 3 times, which makes it possible to close an acquisition the bank would refuse. Second, speed and execution certainty: a fund decides with a tight committee, without the heaviness of a bank pool, a decisive asset facing a seller who wants to sign. Third, structural flexibility: bullet repayment rather than amortisation, an undrawn tranche reserved for future acquisitions, a partially capitalised coupon to preserve cash.

Fourth, private credit fits the logic of the build-up: a serial acquirer can secure a dedicated acquisition line and draw funds as targets appear, without renegotiating each time. Fifth, it frees the shareholder from an overly heavy equity contribution, by financing a larger share of the price with debt, which improves the return on invested capital. In return, this financing costs more and imposes a flawless cash discipline. Private credit is therefore not free, it is strategic.

How a private credit financing is built

The approach is methodical. The first step is measuring debt capacity, from a credible normalised EBITDA: it is this, and not the raw accounting result, that sets the sustainable leverage. The second step is calibrating the leverage itself, expressed as a multiple of net debt over EBITDA, aligned with sector multiples and cash generation. The third step is checking that the flows cover the debt service, measured by the DSCR.

Concretely, a debt fund looks at five metrics before lending. Leverage, net debt over EBITDA, which says how many times the results cover the debt. The DSCR, free cash flow over the debt service, which must stay above 1.1 to 1.3 times. The ICR, or interest coverage, EBITDA over interest, often required above 2 times. The FCCR, which broadens the coverage to all fixed charges, rents included. Finally the equity cushion, the share of equity contributed by the shareholder, a pledge of commitment. The fourth step is the documentation of the covenants, the fifth the due diligence and the quality of earnings required by the lender, the sixth the negotiation of cost and security.

The private credit toolbox

Private credit is not a single instrument but a range, which a good arrangement combines according to the profile of the operation and the available cash. Here are the most common building blocks to finance an SME acquisition.

Unitranche. A single tranche that merges senior and junior debt, carried by a single lender, generally repaid bullet. Simple, fast, often 3.5 to 5 times EBITDA. The base block of mid-market acquisition financing.
Senior secured debt. First rank, backed by security, amortising or bullet. The cheapest, but the most disciplined in covenants.
Second lien. Subordinated in security rank to the senior, more expensive, to add leverage without diluting the shareholder.
Mezzanine. Subordinated debt with a high coupon, often carrying an equity kicker (warrants). The bridge between debt and equity.
PIK (payment-in-kind). Interest capitalised instead of paid in cash, which preserves cash at the price of debt that grows. Powerful, but to be handled with care.
Delayed-draw term loan. An undrawn tranche, reserved to finance future acquisitions in a build-up, against a ticking fee on the undrawn portion.

To these blocks is often added the vendor loan, which completes the round table and aligns the seller with the success of the buyout.

When to use private credit

Private credit imposes itself first when the bank says no or too little: leverage insufficient to close the price, sector deemed risky, atypical buyout file. It is also indicated when speed matters, facing a hurried seller or a competitive process where financing certainty makes the difference. It particularly suits build-up strategies, where a dedicated acquisition line avoids renegotiating at each target, and situations where the shareholder wants to limit the equity contribution to preserve returns.

Conversely, when the bank follows at a far lower cost, when the operation is simple and the leverage moderate, bank credit often remains the best choice. The right reflex is never dogmatic: it consists in putting bank debt, private credit and a mixed solution in competition, then retaining the structure that optimises the pair cost and flexibility for your trajectory. This is exactly the work of an independent mergers and acquisitions adviser.

The Swiss trap: the 10/20 rule and the 35% withholding tax

Here is the point most files ignore, and which can derail a financing in Switzerland. Swiss withholding-tax law recharacterises a debt as a bond as soon as the borrower accepts funds from more than ten creditors on identical terms, the rule of ten, or from more than twenty creditors on differing terms, the rule of twenty. Once recharacterised as a bond, the debt triggers a 35% withholding tax levied at source on the interest, as the circular of the Federal Tax Administration on syndicated loans specifies.

For a private credit financing bringing together several lending funds, this threshold is crossed quickly. The consequence is heavy: 35% of the interest withheld at source, leaving lenders, often foreign, to claim the refund through a double taxation treaty, which jams the economics of the operation. The remedy is structural: keep a single lender, typically a unitranche arrangement, or organise a club of lenders that stays under the thresholds, with an agent that centralises. In French-speaking Switzerland as in Zug, a financing badly put together on this point turns a good deal into a tax nightmare. It is a franco-Swiss reflex that few advisers integrate.

Who to turn to in order to structure your private credit

Three criteria should guide the choice. The first is independence from the lenders: an adviser who genuinely compares the offers, and does not steer towards the fund with which it has an interest, defends your financing cost. The second is the joint mastery of valuation and structuring: sustainable leverage derives from normalised EBITDA and cash generation, so valuation and financing are thought together. The third is dual franco-Swiss competence, indispensable to avoid traps such as the 10/20 rule on the Swiss side or withholding-tax issues on the French side.

Hectelion brings together these three qualities. An independent boutique firm, with dual franco-Swiss expertise and economic independence from traditional financial intermediaries, it structures acquisition financings on operations between 2 and 500 MCHF, putting bank debt, private credit and mixed solutions in competition. Its debt and equity raising relies on a rigorous modelling of leverage and debt service. Hectelion is not FINMA-authorised and does not act on listed-company operations.

Advantages: leverage, speed and structural flexibility

The first advantage is leverage: private credit finances a larger share of the price, which makes possible acquisitions beyond the reach of bank credit alone and improves the return on equity. The second is speed and execution certainty, decisive in a competitive process. The third is flexibility: bullet repayment, partially capitalised coupon, a tranche dedicated to build-ups, covenants negotiated case by case. Where the bank applies a grid, the fund builds to measure.

These strengths read better against bank credit. Here, item by item, is what distinguishes the two sources of financing.

Leverage. Bank: prudent, often 2.5 to 3 times EBITDA. Private credit: higher, 3.5 to 5 times depending on the file.
Timeline. Bank: long, pool and multiple committees. Private credit: fast, a single decision-maker.
Repayment. Bank: constraining amortisation. Private credit: often bullet, cash preserved.
Covenants. Bank: standard and tight. Private credit: negotiated, sometimes lighter, but closely watched.
Cost. Bank: the cheapest. Private credit: more expensive, the price of flexibility and leverage.
Build-up. Bank: renegotiation at each target. Private credit: dedicated acquisition line, drawn as needed.

Concise comparison of bank financing and private credit for an SME acquisition. The detailed table and a debt-capacity calculator are in the Excel file accompanying this publication.

Limits: cost, covenants and refinancing risk

The first limit is cost. Private credit is paid more dearly than bank credit, a high margin over the reference index, an arrangement fee, an original issue discount, sometimes a share of capitalised interest. Over time, the cost gap weighs on the return of the operation. The second limit relates to covenants and control: a fund closely watches the trajectory, and a breach can trigger rights that reshuffle the cards. The third limit is refinancing risk: a bullet debt defers the repayment of the principal to maturity, which assumes the ability to refinance or sell at the right moment, on pain of strain.

To this is added a limit specific to advice: Hectelion acts as an independent structurer and is not FINMA-authorised; the firm substitutes neither for the lawyer who drafts the financing documentation, nor for the tax adviser who secures the withholding-tax and source-retention issues. This division of roles is a strength: it guarantees that the arrangement is optimised on the financing side, without legal or tax grey areas.

The 5 mistakes to avoid

Mistake 1: over-leveraging on a non-normalised EBITDA

Calibrating leverage on a result inflated by non-recurring items leads to indebtedness the cash will not sustain. Sustainable leverage is computed on a normalised EBITDA, restated of exceptionals, not on the reported figure. Leverage too high means a DSCR that breaks at the first slowdown.

Mistake 2: ignoring the Swiss 10/20 trap

Bringing together more than ten lenders on identical terms, or more than twenty on differing terms, recharacterises the debt as a bond and triggers the 35% withholding tax on interest. On a Swiss financing, the lender structure must be thought from the outset, single lender or club under the thresholds, otherwise the economics of the deal collapse.

Mistake 3: neglecting the DSCR in favour of leverage alone

An acceptable leverage does not guarantee that the flows cover the debt service. It is the DSCR, and not the debt multiple alone, that says whether the company will meet its maturities. An arrangement that shows fine leverage but a DSCR below 1.1 times is a time bomb.

Mistake 4: accepting a bullet debt without an exit plan

Bullet repayment appeals because it preserves cash, but it defers all the principal to maturity. Without a credible refinancing or sale plan at that date, the borrower ends up exposed to a wall of debt. Today's flexibility must not mask tomorrow's risk.

Mistake 5: not putting lenders in competition

Settling for the first offer, often the one brought by an interested intermediary, is costly. Private credit is an over-the-counter market where the margin, the covenants and the flexibility are negotiated. Making several funds compete, and the bank alongside, gains margin points and contractual freedoms.

Case 1: build-up of a French-speaking Swiss SME financed by a 20 MCHF unitranche

A technical-services SME based in French-speaking Switzerland, with an EBITDA of 5.0 MCHF, wants to acquire a competitor to accelerate its build-up. The bank caps its offer at 2.5 times EBITDA, insufficient to close the price. A debt fund proposes a unitranche of 20.0 MCHF, that is 4.0 times EBITDA, repayable bullet, with a delayed-draw tranche for the next acquisition. At an illustrative all-in cost of 7.5%, annual interest comes to 1.5 MCHF, that is an interest coverage of 3.3 times. Integrating a voluntary amortisation of 1.0 MCHF, the debt service reaches 2.5 MCHF, covered 1.4 times by a free cash flow of 3.5 MCHF.

The decisive point is the lender structure. The financing is carried by a single fund, through a single agreement, which keeps the operation outside the rule of ten creditors and rules out any risk of the 35% withholding tax. Where a badly assembled club would have triggered a heavy source withholding, the single-lender unitranche preserves the economics of the deal. The result: the SME finances its acquisition, keeps a line ready for the next one, and secures its cash. The bank, for its part, would have sunk the build-up for lack of leverage.

Case 2: LBO of a French industrial SME at 18 M EUR in mixed financing

A French industrial SME, valued at 18 M EUR on an EBITDA of 3.0 M EUR, that is 6.0 times, is the object of an LBO led by its management team. The bank proposes an amortising senior debt of 2.5 times EBITDA over five years, with tight covenants. The buyer prefers a mixed private credit financing: a direct senior debt of 9.0 M EUR, supplemented by a mezzanine tranche of 2.0 M EUR, that is 11.0 M EUR of total debt, or 3.67 times EBITDA, against 7.0 M EUR of equity.

At an illustrative cost of 8.5% on the senior and a cash coupon of 8% on the mezzanine, a capitalised share on top, the cash interest comes to around 0.93 M EUR, that is an interest coverage of 3.2 times. The higher leverage reduces the equity contribution and improves the expected return, while the bullet repayment preserves cash for operations. In return, the arrangement costs more than the bank offer and imposes a rigorous monitoring of the covenants. The buyer arbitrated knowingly: more leverage and flexibility against a higher cost, a choice consistent with its growth trajectory.

A word from the founder

« Private credit is not the bank at a higher price. It is another profession, with another risk logic, and it makes possible operations that bank credit refuses. Still, it must be structured, not endured. »

« What I repeat to buyers is never to take the first offer. The margin, the covenants, the repayment, everything is negotiated. Putting two or three funds in competition, and the bank alongside, gains return points. »

« And in Switzerland, one reflex saves deals: think the lender structure from day one, so as not to wake the 35% withholding tax. It is technical, it is franco-Swiss, and it is exactly where an independent adviser makes the difference. »‍

Aristide Ruot, Founder and Managing Director of Hectelion SA.

FAQ: the 10 essential questions on private credit

Introduction: what to keep in mind before the questions

Private credit is a powerful but demanding financing. The answers below clarify what it costs, what it allows, what it imposes, and the franco-Swiss traps to know before financing an SME acquisition.

Q1: What exactly is private credit?

It is debt financing granted directly by specialised funds, outside the banking circuit and outside listed markets, to finance an acquisition, an LBO or a build-up. The lender is an asset manager, not a deposit bank.

Q2: How does it differ from bank credit?

It accepts higher leverage, decides faster and structures to measure, but costs more and closely watches the trajectory. The bank remains cheaper on simple files with moderate leverage.

Q3: How much leverage can be obtained?

Often 3.5 to 5 times EBITDA, against 2.5 to 3 times for a bank, depending on the sector, the cash generation and the quality of the results. Actual leverage depends above all on the sustainable DSCR.

Q4: How much does private credit cost?

More than the bank: a high margin over the reference index, an arrangement fee, an original issue discount, sometimes a share of capitalised interest. The cost is the price of flexibility and leverage.

Q5: What is a unitranche?

A single debt tranche that merges senior and junior, carried by a single lender, generally repaid bullet. It is the most common building block of mid-market acquisition financing, and it simplifies the lender structure.

Q6: What is the Swiss 10/20 rule?

In Switzerland, a debt contracted with more than ten creditors on identical terms, or more than twenty on differing terms, is recharacterised as a bond and triggers a 35% withholding tax on the interest. The lender structure must stay under these thresholds.

Q7: How to avoid the 35% withholding tax?

By keeping a single lender, typically through a unitranche, or by organising a club of lenders that stays under the thresholds, with a centralising agent. The question is handled from the design of the financing, with a tax adviser.

Q8: Which metrics does the fund look at?

Leverage, the DSCR, interest coverage, fixed-charge coverage and the equity cushion. It is these ratios, not only the acquisition price, that determine the amount lent.

Q9: Does private credit suit build-ups?

Yes, particularly. A delayed-draw tranche allows funds to be reserved for future acquisitions and drawn as targets appear, without renegotiating each time. It is a major asset for a serial acquirer.

Q10: Is due diligence needed to raise private credit?

Yes. The fund requires a solid financial due diligence and quality of earnings, because it lends on the company's ability to generate cash. A well-prepared file gains leverage and margin points.

Acontos: estimate your company's value online for free

Launch the valuation simulator to obtain an order of magnitude, then read on to understand the drivers behind it.

Conclusion: private credit, a tool to structure, not to endure

Private credit has ceased to be a curiosity to become a central source of financing for SME acquisitions, as banks retreat from leverage. It offers leverage, speed and flexibility, at the price of a higher cost and a flawless cash discipline. Well used, it makes possible operations otherwise blocked; badly framed, it erodes the return or, in Switzerland, wakes a 35% withholding tax that destroys the economics of the deal.

The right approach is never dogmatic. It consists in putting bank debt, private credit and mixed solutions in competition, in setting the leverage on a normalised EBITDA and a sustainable DSCR, and in thinking the lender structure from day one. This is where the added value of an independent franco-Swiss adviser lies: optimising the financing, without enduring its traps.

Summary of the article

Private credit is debt financing granted directly by specialised funds, outside the bank and outside the listed market, to finance an acquisition, an LBO or a build-up. It accepts higher leverage, often 3.5 to 5 times EBITDA, decides faster and structures to measure through unitranche, mezzanine, PIK or a delayed-draw tranche dedicated to build-ups. In return, it costs more than bank credit and imposes close monitoring of covenants and cash.

A debt fund lends in view of five metrics: leverage, the DSCR, interest coverage, fixed-charge coverage and the equity cushion. In Switzerland, a major trap lurks: the 10/20 rule, which recharacterises as a bond a debt bringing together too many creditors and triggers a 35% withholding tax on the interest, to be neutralised by a single lender or a club under the thresholds.

The cases of a French-speaking Swiss SME financed by a 20.0 MCHF unitranche and of a French LBO at 18 M EUR in mixed financing show the way forward: set the leverage on a normalised EBITDA, check the DSCR, structure the lenders with care, and put the financiers in competition. Private credit is a strategic tool, to be structured with an independent adviser, not endured.