Definition
Private credit is lending to businesses or projects through non-bank channels, offered to investors as an income-focused alternative to traditional bonds.
How It Works
Investors provide capital that is lent to borrowers, earning interest income. Because the loans are private and often to mid-sized companies, they can offer higher yields than public bonds, with corresponding risk and illiquidity.
Example
An investor allocates to a private credit fund that lends to mid-sized businesses, receiving regular interest distributions.
When It Works Best
It works best for accredited investors seeking income and willing to accept illiquidity and credit risk in exchange for higher potential yield.
Who It Applies To
Accredited and institutional investors.
Watch-Outs
Private credit carries borrower default risk, illiquidity, and fees, and interest income is generally taxed at ordinary rates. The quality of underwriting drives outcomes.
