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2025 Lower-Middle-Market Financing Lookback
How Things Changed for Borrowers
Shaun Tiwari
January 23, 2026 • Estimated Reading Time: 7 minutes
If you financed a deal in 2025, or tried to, you felt the shift.
Not a dramatic shift. Not a crash. Just a recalibration of what lenders wanted, what they'd pay for risk, and how quickly they'd move.
Looking back now from January 2026, a few themes stand out. Some of them were predictable. Others caught borrowers off guard.
Here's what we saw across our lower middle market deal flow last year, and what it means heading into this year.
(Note: This lookback focuses on LMM financing, including private credit, conventional banks, SBICs, and other non-SBA capital sources. We'll do a separate SBA-specific lookback next week for those focused on that side of the market.)
The Rate Plateau Nobody Planned For
Remember the predictions coming into 2025? Most people expected 3-4 Fed cuts by year end. The consensus was that rates were heading down, and borrowers should just wait it out.
That's not what happened.
The Fed held steady for most of the year. Inflation stayed stubborn. And borrowers who waited for "lower rates" found themselves in the same rate environment six months later, except now they were competing against buyers who stopped waiting.
What we actually saw:
• Base rates stayed elevated (SOFR in the 4.5-5% range for most of the year)
• Credit spreads compressed as lenders competed for quality deals
• All-in borrowing costs for strong credits landed around 8-10%
• Weaker credits or thinner deals saw spreads widen, not compress
The takeaway? For well-structured deals with quality borrowers, 2025 wasn't a bad financing environment. The rate wasn't 2021 cheap, but it was stable and predictable. Lenders wanted to deploy capital.
If 2024 was the year private credit went mainstream, 2025 was the year it became the default option for a huge swath of the middle market.
The numbers tell the story. Private credit AUM crossed $1.7 trillion globally. Fundraising stayed strong. And most importantly, lenders were actively competing for deals in a way they hadn't in previous years.
What this meant for borrowers:
• More options at the $3M-$10M EBITDA level than ever before
• Faster execution (some deals closing in 4-6 weeks from term sheet)
• More flexibility on structure, covenants, and add-on capacity
• Pricing that actually came down as lenders competed
We saw multiple situations where borrowers ran a competitive process and got 50-75 bps knocked off their spread just by creating leverage among lenders.
The flip side? Private credit lenders got pickier about credit quality. They had enough deal flow to be selective. Marginal credits, customer concentration issues, or thin management teams got passed over quickly.
The winners were borrowers who had clean stories and ran organized processes. The losers were borrowers who assumed capital was abundant and didn't need to sell themselves.
The Bank Pullback You Didn't See Coming
While private credit was expanding, traditional banks pulled back in ways that surprised some borrowers.
Part of this was CRE spillover. Regional banks in particular were still dealing with commercial real estate exposure from 2023-2024. Even if your deal had nothing to do with real estate, your bank might have been tightening across the board.
What we saw:
• Relationship banks declining deals they would have done two years ago
• Longer approval timelines at banks (committees getting more conservative)
• Lower hold sizes forcing more club deals or syndications
• Banks prioritizing deposit relationships over pure lending
This hit borrowers who assumed their banking relationship would carry them through. "We've banked here for 15 years" wasn't enough for some deals.
The borrowers who navigated this well had backup options lined up. They knew their bank might get conservative and had already opened conversations with private credit or other bank alternatives.
What Borrowers Got Wrong
Looking back, a few patterns emerged among borrowers who had difficult 2025 financing experiences.
Waiting for lower rates. Already covered this, but it's worth repeating. Rates didn't drop meaningfully, and waiting cost borrowers deal opportunities and negotiating leverage.
Over-leveraging on optimism. Some buyers underwrote aggressive growth projections and sized their debt accordingly. When the business performed at plan (not above plan), they found themselves tight on covenants in year one. Lenders saw this coming and either passed or required tighter terms.
What We're Seeing Heading Into 2026
It's early, but Q1 deal flow is telling us a few things.
Private credit competition is intensifying. More funds are in market, and they're being aggressive on pricing for quality deals. This is good for borrowers.
Banks are stabilizing but not loosening. The extreme pullback of mid-2025 has moderated, but banks aren't rushing back to aggressive lending. Expect them to be competitive on the right deals but still conservative overall.
Rate expectations have reset. Borrowers aren't waiting for dramatic cuts anymore. They're underwriting current rates and planning accordingly. This is healthier for deal activity.
The Bottom Line
2025 wasn't the year of falling rates that many predicted. But it also wasn't a bad environment for borrowers who approached it correctly.
The lenders who wanted to do deals did deals. The borrowers who ran competitive processes and didn't wait for perfect conditions got attractive terms. And private credit continued its march toward becoming the dominant capital source for middle market businesses.
Going into 2026, the playbook is similar: know your options, run a process, and don't let rate speculation drive your timing.
Covenant structures are normalizing. After a stretch of tighter initial covenants, we're seeing more flexibility come back for strong credits. Lenders would rather win deals than over-protect against downside.
The borrowers who will do well this year are the ones who have realistic expectations, run organized processes, and move when they find the right capital partner. The window for well-positioned deals is open.
Single-sourcing their financing. Running with one lender relationship is fine when credit is loose. In 2025, borrowers who ran competitive processes consistently got better outcomes than those who didn't.
Underestimating timeline. Deals took longer than expected across the board. Bank processes stretched. Diligence got more thorough. Borrowers who built buffer into their timelines closed; those who didn't found themselves scrambling.
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