Private lender vs bank financing

Not every Canadian acquisition gets financed by a chartered bank, and not every deal that turns to a private lender does so because a bank said no outright. Private capital and bank capital sit at genuinely different points on the trade-off between speed and flexibility on one side, and cost and standardization on the other, and a buyer weighing them is really weighing which side of that trade-off matters more for their specific deal.

Private lender financing

A private lender — an individual investor, a private debt fund, or a specialty finance company operating outside the chartered banking system — is generally able to underwrite and close faster than a bank, because its decision process is not built around the same standardized credit committee structure, and it is often more willing to look past a thin operating history, softer collateral, or an unconventional deal structure that a bank’s policies would simply screen out. That flexibility is priced: private capital typically costs more than bank debt, documentation is less standardized from one lender to the next, and because private lenders are not deposit-taking institutions, they are not subject to the same banking-specific regulatory oversight, which makes it worth confirming exactly who is being dealt with and on what terms before committing.

• Can often underwrite and close faster than a bank, with more flexible credit criteria
• More willing, in many cases, to finance a thin track record, softer collateral, or an unconventional structure
• Generally the higher-cost source of debt capital in a Canadian acquisition financing stack
• Not a deposit-taking institution, so terms, documentation and standards vary far more between individual private lenders

Bank financing

A chartered bank underwrites against standardized, conservative criteria applied fairly consistently across its lending book, which generally produces a lower cost of capital than a private lender but a slower process and less tolerance for a deal that does not fit its policies cleanly. Banks are heavily regulated deposit-taking institutions, which is part of why their underwriting is more conservative and their documentation more standardized than a private lender’s — the trade-off for that lower cost is less room to negotiate around a weak spot in the deal.

• Generally the lower-cost source of acquisition debt for a deal that fits standard underwriting
• Slower and more standardized underwriting, with less room to negotiate around a weak spot in the deal
• Heavily regulated as a deposit-taking institution, which shapes how conservatively it lends
• Often the natural senior lender where a private lender is also involved in the same deal

How to choose

A buyer with a straightforward deal, a clean track record and time to go through a full underwriting process is usually better served, on pure cost, by a bank. A buyer facing a tight closing timeline, a target with unconventional financials, or a gap a bank will not fully cover is where a private lender most often enters the conversation — sometimes as the whole solution, sometimes as a bridge that gets refinanced by a bank once the business has a track record under the new owner. Where a private lender and a bank both hold security over the same business, the priority between them needs to be documented in an intercreditor arrangement rather than left implicit, and confirming exactly how a private lender is registered and regulated is worth doing before signing anything.