What Protections Should an Investor Look for in a Private Credit Agreement?

A private credit agreement should make clear how you get paid, what secures repayment, and what you can do if the borrower defaults. I start by checking the economics and the enforcement terms together. A stated interest rate means little if repayment depends on vague promises or collateral that is hard to value or reach.

Define Repayment and Default Terms

Read the payment schedule, maturity date, interest calculation, and any provisions that change the rate after a missed payment. Confirm what counts as a default, whether there is a cure period, and what remedies the lender can use. The agreement should also explain whether the borrower can prepay, extend the loan, or refinance, and what happens to interest and fees in each case.

Ask whether the borrower can take on additional debt or sell important assets without your consent. Review any restrictions on distributions, asset transfers, or changes in control. These terms can affect the borrower's ability to repay and the value available to creditors if the business comes under pressure.

Understand the Collateral and Priority

Identify each asset securing the loan, who owns it, and whether another lender has a claim ahead of yours. A collateral description should be specific enough to understand what the lender could pursue. Consider whether the asset's value could fall, whether it is already pledged, and whether it can be sold without major cost or delay. A personal guarantee may add a repayment source, but its value depends on the guarantor's assets and the agreement's enforceability.

Debt is senior to equity, but creditors can still have different levels of priority. Ask where your loan sits in that order and whether other claims could reduce your recovery. A loan backed by valuable property can still carry risk if the lien is weak, the asset is difficult to sell, or the borrower has other secured creditors.

Check Lender Rights and Information Access

Look for clear rights to receive financial reporting, notice of material events, and information about additional borrowing or changes to the collateral. If the loan is made through a syndicate or investment vehicle, understand who controls enforcement and how members make decisions. The agreement should explain how disputes are resolved and whether the lender can transfer its position.

Compare the contractual protections with the actual plan for recovery. If repayment depends on a business remaining healthy, examine its cash flow and debt load. If repayment depends on taking possession of property, understand the process, costs, and local legal requirements with your attorney.

Have Counsel Review the Documents

Private credit terms can be spread across a note, security documents, guarantees, and related agreements. Read them as one package and make sure nothing essential rests on a verbal assurance. I recommend having your own qualified legal counsel review the transaction and explain the rights you would hold in a default.

For a broader process, see our guide to working with service providers and portfolio models. You can also review how families weigh liquidity and potential return and ways to reduce forced selling.

There is certainly a high degree of risk in buying debt or lending capital, but an experienced team can earn consistent profits simply from the SFO's cash.

Sources: The Single Family Office. Informational only, not financial, legal or tax advice.