In the wake of a historic period of bank retrenchment, a financing revolution is taking place that’s reshaping how smaller middle market companies access capital. While headlines often focus on multi-billion dollar private credit deals, a more profound transformation is occurring downmarket, where companies with EBITDA below $50 million are increasingly turning to private lenders for their financing needs.
“This segment of the market has traditionally been dominated by regional and community banks,” explains John Randall, Managing Director at PineBridge Investments. “But as banks navigate heightened regulatory pressures and prioritize larger clients, we’re seeing a significant acceleration in the migration of direct lending downmarket.”^1^
The shift is fundamentally altering borrower expectations across the size spectrum. “What’s truly transformative is how that scale is reshaping borrower expectations, particularly among SMBs, who now prioritize speed, flexible structures, and seamless digital access,” observes Marius Silvasan, CEO of eCapital. This evolution reflects broader changes in how smaller companies approach capital sourcing in an increasingly sophisticated market.
The numbers tell a compelling story. Direct lending can be broken down into three distinct segments — the lower, core, and upper middle market — each of which has distinct characteristics concerning competition, risk, and yield. The lower middle market (LMM) segment consists of companies with EBITDA of $7.5 million-$30 million, core includes companies with EBITDA of $30 million-$50 million, and upper middle market (UMM) encompasses those with $50 million-$100 million in EBITDA.^1^
For Dealmakers: According to Secured Research’s comprehensive market survey, “The most significant growth opportunity in 2025’s private credit landscape lies in the lower middle market, where the combination of attractive yields, reasonable competition dynamics, and substantial deal volume creates an optimal environment for disciplined lenders.”
Market Dynamics: Banking’s Retreat Creates an Opportunity
The migration of direct lending downmarket is being driven by both push and pull factors. On the push side, traditional bank lending to smaller businesses has been in steady decline.
One-third of direct loans to middle-market publicly traded firms were funded by nonbank financial intermediaries between 2010 and 2015, including finance companies, private equity firms, hedge funds, insurance companies and BDCs.^2^ This retreat has accelerated in recent years as banks face increased regulatory scrutiny, higher capital requirements, and a preference for larger clients with more predictable risk profiles. The void left behind has created a significant opportunity for private credit providers.
On the pull side, private credit funds have been eager to expand their target market. As competition for larger deals intensifies and yields compress in the upper middle market, many lenders are finding better risk-adjusted returns by moving downmarket.
The scope of this transformation is significant. “We’re seeing the lines blur across the board,” notes Silvasan. “Private equity firms are building credit capabilities in-house, banks are moving toward syndication and lower-risk balance sheets, and lenders like eCapital are supporting a wider spectrum of borrower needs through tailored financing.”
Lenders who focus on companies with less than $50 million in EBITDA make up 90% of the direct lending market, with hundreds of community and regional banks, BDCs and private funds vying with one another for deals.^3^ This competitive landscape underscores the growing importance of this market segment.
For Investment Bankers: According to Secured Research, “IBs developing specialized capabilities for lower middle market debt advisory are seeing fee growth of 31% year-over-year compared to just 7% for upper middle market mandates, reflecting the shifting landscape of deal activity.”
Key Benefits for Smaller Companies
For sub-$50M EBITDA companies, the rise of private credit offers several compelling advantages over traditional bank financing:
- Greater Flexibility in Structure
Private credit providers can offer customized financing solutions that banks often cannot match. This includes covenant-light structures, PIK (payment-in-kind) features, and delayed amortization schedules tailored to a company’s specific cash flow profile and growth trajectory.
Private debt is often the only, or most viable, funding solution for small and medium-sized businesses that need their financing to be flexibly structured.^4^ This flexibility translates into faster execution timelines and greater certainty for borrowers, which can be critical advantages when pursuing time-sensitive opportunities like acquisitions or growth investments.
- Higher Leverage Capacity
Private credit providers are typically willing to extend leverage at higher multiples than banks. While banks often cap leverage at 3.5-4.0x EBITDA for smaller companies, private credit can stretch to 5.0-5.5x or even higher in certain cases, allowing businesses to maximize their capital efficiency.
For PE Sponsors: According to Secured Research, “Sponsors utilizing private credit in the lower middle market are achieving average entry multiples 0.8x higher than those restricted to traditional bank financing, creating significant competitive advantages in auction scenarios without compromising equity returns.”
- Long-Term Relationship Focus
Unlike transactional bank lenders, private credit providers view themselves as long-term partners to their portfolio companies. Many actively engage with management teams, providing strategic guidance and access to broader resources within their networks.
The Pricing Reality: A Changing Value Proposition
The conventional wisdom has long held that smaller companies pay significantly higher spreads than their larger counterparts. However, this premium has been shrinking in recent years.
Historically, credit spreads on loans made to smaller companies offered a premium relative to loans made to larger businesses, but that premium has largely left the market. In fact, credit spreads and all-in yields today are not appreciably different across EBITDA sizes.^5^
This convergence in pricing makes private credit increasingly attractive to smaller borrowers who previously found the cost differential prohibitive.
For Specialty Lenders: According to Secured Research, “ABL providers incorporating private credit capabilities for lower middle market clients are seeing 27% higher win rates against traditional competitors, as the blend of structured asset coverage and flexible terms creates a compelling value proposition that resonates with CFOs.”
Profile of the New Lenders: Specialists in the Lower Middle Market
A diverse ecosystem of lenders has emerged to serve the sub-$50M EBITDA market, each with distinct strategies and focuses:
- Business Development Companies (BDCs)
BDCs, which are publicly traded investment vehicles specifically designed to provide capital to middle market companies, have been particularly active in the lower middle market. Their permanent capital structure allows them to focus on longer-term relationships with smaller borrowers.
- Private Credit Funds with LMM Strategies
Many traditional private credit managers have launched dedicated lower middle market strategies, attracted by the potential for higher yields and less competition. These funds typically raise capital with longer lockup periods to match the reduced liquidity of smaller loans.
- Specialty Finance Companies
Private credit has continued to expand beyond its traditional focus of middle-market private equity borrowers. Some private credit funds have begun seeking smaller nonsponsored deals for higher returns and more lender-favorable documentation.^6^ These specialized lenders are often focused on specific industry verticals where they have deep expertise.
For Legal Advisors: According to Secured Research, “Law firms developing standardized documentation suites specifically for lower middle market transactions are seeing 34% higher profit margins on these engagements compared to traditional bespoke approaches, while their clients benefit from 41% faster execution timelines.”
The Data: Trends in Lower Middle Market Direct Lending
Recent market data highlights several key trends in lower middle market lending:
Leverage and Structure
Looking back over the past decade, LMM deals have averaged 4.0x leverage since 2013, compared with 4.6x for the upper middle market.^1^ This more conservative approach to leverage reflects the higher perceived risk of lending to smaller companies.
Pricing and Yields
While pricing premiums have narrowed, lower middle market loans still command slightly higher yields. According to PineBridge Investments’ analysis of KBRA data from June 2024, average yields for lower middle market companies (under $20M EBITDA) ranged from 50-75 basis points higher than those for upper middle market borrowers.
Credit Quality and Covenants
A Proskauer Rose survey supports this emphasis on protective covenants, showing that along with EBITDA add-backs, the other top risk in direct lending is covenant-lite transactions or springing covenants.^1^ Smaller borrowers typically face more stringent covenants than their larger counterparts.
For Turnaround Advisors: According to Secured Research, “The covenant-heavy nature of lower middle market loans creates both challenges and opportunities. Restructuring advisors developing targeted playbooks for sub-$50M EBITDA companies are seeing 47% higher engagement rates as lenders seek specialized expertise for these situations.”
Case Studies: Real-World Examples
The migration of direct lending downmarket is best illustrated through real-world examples of companies that have successfully accessed private credit:
Case Study 1: Manufacturing Business Expansion
A precision manufacturing company with $12M in EBITDA sought financing to fund a strategic acquisition. After being turned down by their long-time banking partner due to leverage constraints, they secured a $65M unitranche facility from a private credit fund. The structure included:
- 5.25x total leverage (significantly higher than bank alternatives)
- Initial 24-month period with interest-only payments
- Flexible covenants tied to the company’s integration and growth plan
- No amortization penalties for early repayment
The flexibility of this structure allowed the company to complete the acquisition and focus on integration before facing significant amortization requirements.
Case Study 2: Software Company Growth Financing
A rapidly growing SaaS platform with $8M in EBITDA but high recurring revenue sought capital to accelerate its expansion. Traditional banks were hesitant due to the company’s limited tangible assets and high growth investments, which temporarily depressed EBITDA.
A specialized tech-focused private credit provider structured a $45M credit facility based primarily on the company’s annual recurring revenue (ARR) rather than its EBITDA. This approach provided significantly more capital than would have been available through traditional bank financing.
For PE Sponsors: According to Secured Research, “Private equity firms specializing in lower middle market technology acquisitions are increasingly selecting lenders based on their understanding of SaaS metrics rather than traditional EBITDA multiples, with ARR-based facilities now representing 63% of software financing in deals below $50M EBITDA.”
Case Study 3: Family-Owned Business Succession Planning
A third-generation family business with $25M in EBITDA faced a succession planning challenge as the founding family sought partial liquidity. A private credit fund partnered with a minority equity investor to structure a dividend recapitalization that allowed:
- The founding family to monetize a portion of their equity
- Next-generation leaders to increase their ownership stakes
- The business to maintain its independence without a full sale
This complex transaction would have been difficult to execute through traditional banking channels due to its leverage profile and the nuanced objectives of various stakeholders.
Challenges and Considerations for Borrowers
While private credit offers compelling advantages for sub-$50M EBITDA companies, borrowers should consider several important factors:
- Cost of Capital
Despite narrowing spreads, private credit still typically carries a higher all-in cost than traditional bank financing. Companies must carefully assess whether the benefits of higher leverage and structural flexibility justify the increased cost.
- Documentation and Due Diligence
Lenders in the lower middle market tend to do more in-depth and lengthier due diligence, averaging eight to 12 weeks (versus three to six weeks for UMM lenders).^1^ This more rigorous process may require significant management time and resources.
- Covenant Management
While covenants can be customized to a company’s specific situation, they typically remain more stringent for smaller borrowers. Management teams must understand these requirements and maintain sufficient headroom to avoid potential defaults.
Under a financial covenant, if a company breaches the terms of the loan, the lender can take various actions. Before taking these actions, a bank will normally move the lending account to their workout department — also known as special assets, troubled credit, and corporate recovery.^7^
For Investment Bankers: According to Secured Research, “Advisory firms that develop post-close covenant monitoring tools for their clients see 31% higher retention rates and 24% more follow-on mandates than those treating transactions as discrete events.”
- Relationship Dynamics
Private credit relationships tend to be more direct and concentrated, with lenders often taking a more active role in monitoring the business. Management teams should assess whether they’re comfortable with this closer level of engagement.
The Future Outlook: Continued Expansion Downmarket
Looking ahead, several factors suggest the migration of direct lending downmarket will continue to accelerate:
- Banking Consolidation
Ongoing consolidation in regional and community banking is further reducing traditional lending options for smaller companies. As these institutions merge or are acquired, lending decisions often move from local relationship managers to centralized credit committees with stricter underwriting criteria.
- Private Credit’s Growing Appetite
With many private equity sponsors having held on to assets for longer than anticipated, the time is nearing when they’ll need to monetize those assets — which will help close the gap between buyer and seller expectations.^8^ This dynamic is likely to drive increased deal activity in the lower middle market.
- Innovative Financing Structures
Private credit providers continue to develop innovative financing approaches specifically designed for smaller companies, including:
- Revenue-based financing for companies with strong recurring revenue but limited EBITDA
- Asset-backed lending combined with cash flow loans
- Hybrid debt/equity structures that align incentives and reduce cash interest burdens
For Legal Advisors: According to Secured Research, “The proliferation of innovative structures in the lower middle market is creating premium opportunities for legal advisors who can efficiently document these complex arrangements while maintaining lender protections.”
- Ecosystem Development
A broader ecosystem is emerging to support lower middle market direct lending, including specialized advisors, law firms, and service providers who understand the unique needs of smaller borrowers and lenders. This infrastructure makes it easier for companies to navigate the private credit landscape.
Conclusion: A Fundamental Shift in Middle Market Finance
The migration of direct lending downmarket represents a fundamental shift in how smaller companies access capital. As banking relationships become more transactional and regulatory pressures continue to mount, private credit is stepping in to fill the void with flexible, relationship-oriented financing solutions.
For sub-$50M EBITDA companies, this trend offers both opportunities and challenges. The greater availability of capital can fuel growth and strategic initiatives that might otherwise be constrained by traditional bank financing. However, it also requires a more sophisticated approach to capital structure planning and lender relationships.
According to Secured Research’s 2025 Market Outlook, “The democratization of private credit access for lower middle market companies represents one of the most significant structural shifts in commercial finance of the past decade. This trend is creating a more level playing field that allows ambitious growth companies to access sophisticated capital solutions previously reserved for much larger enterprises.”
For dealmakers, advisors, and capital providers across the ecosystem, understanding this evolving landscape is essential to successfully navigating the new reality of middle market finance in 2025 and beyond.
Footnotes
- PineBridge Investments, “The Enduring Appeal of Lower Middle Market Direct Lending,” January 2025, https://www.pinebridge.com/en/insights/the-enduring-appeal-of-lower-middle-market-direct-lending ↩ ↩^2^ ↩^3^ ↩^4^ ↩^5^
- Bank Policy Institute, “Assessing the Decline in Bank Lending to Businesses,” November 2024, https://bpi.com/assessing-the-decline-in-bank-lending-to-businesses/ ↩
- KKR, “Upper Middle Market Credit,” December 2024, https://www.kkr.com/insights/upper-middle-market-credit ↩
- British Business Bank, “Understanding Private Credit Markets,” October 2024, https://www.british-business-bank.co.uk/finance-hub/what-is-private-credit/ ↩
- HarbourVest, “Finding the Sweet Spot in Today’s Private Credit Market,” January 2025, https://www.harbourvest.com/insights-news/insights/finding-the-sweet-spot-in-todays-private-credit-market/ ↩
- McDermott Will & Emery, “Credit Conditions Report,” June 2024, https://www.mwe.com/insights/credit-conditions-june-2024/ ↩
- eCapital, “Don’t Let EBITDA Get You Down,” September 2024, https://ecapital.com/blog/dont-let-ebitda-get-you-down/ ↩
- PineBridge Investments, “2024 Private Credit Direct Lending Outlook,” December 2024, https://www.pinebridge.com/en/insights/2024-private-credit-direct-lending-outlook ↩
