Private credit rises as bank lending slows
Spain’s lower credit needs eased strain, while Italy faced rising
demand and tighter access. As lending fragments, firms need flexible, precise capital.
Executive Summary
The first quarter of 2025 highlighted diverging trends in the European corporate finance landscape. While access to funding has
modestly improved for large firms, SMEs continue to face structural challenges in securing capital for working capital and asset-backed investments. The macroeconomic outlook remains mixed, with stagnant turnover growth, modest GDP performance, and early signs of inflationary pressure easing. Banks are cautiously reopening lending channels, but alternative lenders are stepping in more decisively to meet evolving corporate funding needs.
Financing Conditions
Despite volatile economic indicators, 12% of surveyed companies reported a 100bps decrease in bank lending rates, a welcome sign of easing financial conditions. Nonetheless, only 4% of firms reported a reduced need for bank loans, indicating that demand for funding remains persistent, particularly for operational and growth investments.
Positivity around future bank financing availability is rising, but
slowly. A modest improvement in sentiment reflects cautious optimism among
CFOs, particularly in large enterprises. However, expectations of tighter credit conditions persist, especially among smaller businesses.
Corporate Funding Needs vs Availability
The funding gap remains material. Among 11,000 firms surveyed:
- 46% used bank funding for capex and inventory
- 39% tapped bank lines for trade finance and working capital
- 7% reported increased need for trade credit, reflecting regional sourcing trends across EU borders
These figures highlight that bank dependency remains high, even as credit conditions shift.
Compounding this issue is a net 21% of companies expecting reduced access to bank loans, a signal that the supply of funding is not aligning with corporate demand. Historically, banks respond early to economic uncertainty by tightening deployment, a pattern repeating now
Business Performance and Outlook
Despite more constructive funding sentiment, only 6% of companies saw turnover grow above 5% in Q1 2025. This underscores a disconnect between expectations and realised performance.
Companies appear to be front-running recovery, potentially anticipating new orders and partnerships. This expectation-led optimism is particularly evident in capital expenditure intentions—just 5% invested in Q1, while double that number plan to do so in Q2.
Inflation fears have subsided—50% fewer companies expressed concern compared to Q4 2024. Still, companies expect 2.5% price increases by year-end, which could slow further ECB rate cuts.
The Bank Lending Divide
Bank behaviour has bifurcated sharply:
- Large firms enjoy easier terms—lower collateral, lighter covenants, and cheaper capital
- SMEs face increasing friction—not due to creditworthiness, but due to process burdens and rigid lending criteria
This divergence has widened the funding gap.Many SMEs feel discouraged from applying for bank loans and are actively seeking flexible, bespoke alternatives.
Europe: Two realities in corporate finance
The first quarter of 2025 reveals a clear divide: large firms gain easier access to low-cost credit, while SMEs remain stalled by red tape and rigid banking. Financial pressure is easing, but growth and investment are still lagging.
Rise of Alternative Lending
What’s striking in Q1 is that 25% of large companies now consider alternative
lenders more attractive than banks, even as banks offer improved terms. Why? Because alternative lenders offer:
- Speed
- Tailored terms
- Structurally flexible capital
This trend signals a shift in mindset. Even well-capitalised corporates are moving away from banks when seeking growth-aligned capital structures.
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APG’s Market View
At APG Capital, we see cherry-picking opportunities in private credit. High-quality SMEs with strong balance sheets and clear cash flow visibility remain underserved by traditional banks—despite macro tailwinds.
Our conversations with banks and fintechs at the Spanish Factoring Association General Assembly confirm that:
- Demand for SME and mid-cap funding is expected to rise 5–10%
- Growth is primarily intra-European, driven by nearshoring and trade realignment
- A 14% increase in underperforming companiesuggests uneven recovery
The need for structured, well-collateralised financing is growing. As firms consider mezzanine, equity, and off-balance-sheet project structures, alternative lenders are better positioned than banks to deliver.
Economic Indicators
The Euro Area economy remains fragile but stable:
- 0.8% Real GDP YoY growth in 2025
- Forecasts: 1.2% in 2026, 1.3% in 2027
- Unemployment expected at 6.2–6.3% through 2027
- Germany’s GDP forecasted to rise from 0.1% (2025) to 1.3% (2027)
Distress rates are low: only 5% of SMEs and 3% of large firms report struggling to meet debt obligations. But default risk isn’t evenly distributed. Careful underwriting is essential.
Alternative Lending Takes the Lead
Alternative lenders gain ground: 1 in 4 large firms now prefer them over banks—not just for speed, but for flexible, growth-aligned financing. Even strong SMEs remain underserved by traditional credit.
Graphs and comments about Italy and Spain:
The euro area faced a decrease in availability of bank loans during Q1 2025 when compared to last quarter (Q4 2024). Additionally, we have seen an overall increase in the availability of bank loans in this quarter compared to the last.
In countries where availability decreased, we can see that it is a trend for needs to also have a decrease at a similar or faster rate, which therefore has helped maintain reported vulnerability in the euro area at the same rate as in the last quarter.
Notable countries for this report are Spain and Italy. While Spain follows the overall trend of decreased needs, we also see decreased availability. Nevertheless, since the fall in needs was steeper than the fall in availability, the overall effect is a decrease in reported vulnerability.
On the other hand, Italy reported an increased vulnerability as its needs increased and the availability of bank loans decreased.
Falling needs soften lending strain
During Q1 2025, both Portugal and the Netherlands experienced a decrease in credit availability—but this was offset by an even steeper drop in credit demand. As a result, these countries maintained low vulnerability, showing that in.
Portugal
Credit needs are falling faster than availability, easing financial pressure and keeping vulnerability low
Netherlands
A similar dynamic plays out: reduced demand helps offset tighter credit, keeping overall risk contained.
Supply drops first, strain builds
In countries like Finland and Italy, credit tightening wasn’t offset by falling needs—leading to more financial pressure and higher risk.
Finland
Credit availability dropped more than demand, increasing financial strain and leading to a rise in reported vulnerability.
Italy
Italy shows a more balanced decline in both credit needs and availability—but reported vulnerability remains elevated, signaling ongoing financial stress
Conclusion & Outlook
Europe’s mid-market continues to face a persistent funding gap through 2024 and early 2025, largely driven by banks’ cautious risk appetite. This comes at a time of rising demand for goods and services, with EU policymakers advancing long-term strategies to address geopolitical tensions and strengthen intra-European trade.
Private credit is uniquely positioned to step in—not only supporting large and mid-sized corporates, but also empowering non-bank lenders that play a critical role in extending liquidity across Europe’s diverse economies.
The market is not one-size-fits-all. For loan originators and private credit investors, 2025 calls for precision:
- Identify sectors vulnerable to tariffs or energy costs
- Prioritise companies with strong governance and margins
- Embrace overcollateralised, covenant-structured credit
Default rates are falling, but 18% of firms still report falling profits. While some are scaling back, others are preparing to invest and grow.
These firms need capital structures that banks may be too slow or too rigid to offer. This is where private credit thrives.
