Direct Lending

In traditional lending, a bank sits between the borrower and the ultimate source of capital. Direct lending removes that middleman. The lender — which might be a fund, an institutional investor, or a family office — negotiates terms directly with the borrowing company and holds the loan on its own books. This places the lender in a closer, more hands-on relationship with the borrower than owning a bond on a public exchange would.

For families exploring private credit, direct lending is often the most straightforward expression of the strategy. A loan might be structured with a floating interest rate — meaning the rate adjusts as a benchmark rate moves — and may include protective covenants, which are contractual rules the borrower must follow, such as maintaining a minimum level of cash flow. These features give the lender ongoing visibility into the borrower's financial health.

Consider a family office that lends to a regional manufacturing company that cannot access public bond markets. The family office earns interest income, holds a senior claim on the company's assets if things go wrong, and negotiates terms tailored to both parties. A common confusion is treating direct lending and mezzanine debt as synonyms — direct lending typically refers to senior or first-lien loans, while mezzanine sits lower in the capital structure. Families considering any lending activity must work with qualified attorneys and CPAs given the legal and tax complexity involved.