The Capital Window Is Closing: Why “Good Companies” Are Suddenly Stranded
“Every credit index, we’re tightening across the board.” — Don McCree, Head of Commercial Banking, Citizens Financial Group, Q3 2025 Earnings Call
Across the lower middle market, capital hasn’t disappeared; it’s simply become selective. The Fed’s Senior Loan Officer Opinion Survey shows that nearly half of U.S. banks tightened commercial lending standards for mid-sized borrowers through late 2024 and early 2025. GF Data reports deal volume down more than 30 percent from its 2021 peak. Private credit, despite managing more than $1.6 trillion globally, has narrowed its focus to sponsor-backed or governance-mature borrowers.
Capital still flows, but only to those who treat resilience as an operating system. In this cycle, allocators—not operators—define who stays bankable, buyable, and buildable.
Market Evidence: The Window Narrows
The tightening began in 2023 when rate policy and regulation started pulling in the same direction. After the collapses of Silicon Valley Bank and First Republic, new Basel III capital rules and tougher oversight pushed regional banks to hold more reserves against commercial loans. By early 2024, many lenders in the $10 to $100 billion asset range had scaled back new credit for owner-led companies.
At the same time, deposit costs surged. The average rate on interest-bearing deposits climbed from 0.06 percent in 2021 to more than 4 percent by mid-2024. That swing erased the margins regional banks once earned on low-cost liquidity. Most responded by stepping away from segments that demanded more monitoring and carried less collateral protection, with the lower middle market among the hardest hit.
Private credit stepped into the gap but cautiously. The sector now manages more than $1.6 trillion globally, up from $875 billion in 2020, according to Preqin. Yet underwriting has become stricter. Funds prefer sponsor-backed deals with strong reporting and governance. Independently owned firms often do not make it past screening.
Deal activity tells the same story. GF Data shows lower-middle-market volume down by roughly a third since 2021. Purchase multiples have fallen from about 7.5× to 6× EBITDA, and leverage has dropped nearly a full turn.
Liquidity hasn’t vanished. It has shifted toward companies that show discipline—those that act like stewards of capital, not just producers of it.
Owner Diagnosis: Why “Good” Companies Are Failing the Test
Many owners blame sentiment, but the change runs deeper. Credit and equity markets have moved from rewarding performance to rewarding resilience.
In 2021, profit was proof enough. With near-zero interest rates and abundant private capital, almost any solid balance sheet could attract financing. When the Federal Funds Rate rose from 0.25 percent to over 5 percent by mid-2023, borrowing costs multiplied and lenders began screening for durability instead of yield.
That is where many mid-market firms have hit a wall. They are efficient but hard to evaluate. Few have formal governance or automated reporting. Many cannot show how decisions get made or how cash is redeployed under pressure. The business works, but to outsiders it looks opaque.
This lack of visibility reads as risk. Lenders tighten covenants or walk away. Investors discount valuations or extend diligence. What owners experience as a liquidity problem is really a transparency problem, a re-pricing of trust.
Capital is still available. It is looking for companies that behave like investors in their own enterprise—the ones that make decisions with evidence, measure risk in real time, and can explain how they create value, not just that they do.
Allocator Solution: How Resilience Becomes Capital
The firms still raising capital or completing acquisitions have one thing in common: visible system maturity. Their lenders can trace how money moves through the business, from operations to reinvestment. They can see the logic, not just the results.
These companies treat resilience as a working asset. They build models that bend under pressure without breaking: recurring revenue, flexible cost structures, and governance that shortens the distance between signal and decision. When outsiders can see that discipline, they price the risk lower.
More owners are starting to operate this way, thinking like allocators rather than operators. The shift is practical, not theoretical. It comes down to three habits:
Measure resilience before you need it. Track liquidity, customer concentration, and reporting reliability as if a lender were already testing them.
Plan in short allocation cycles. Replace rigid annual budgets with ninety-day reviews that tie strategy directly to measurable deployment of time and capital.
Make the story match the structure. Ensure your stated strategy aligns with how the business actually spends and invests.
These are not new ideas. They have simply become the price of admission. The gap between “good company” and “credible borrower” now depends on the quality of evidence. Firms that institutionalize discipline earn cheaper debt, faster diligence, and stronger options when markets reopen.
In today’s market, maturity is not about size. It is about visibility. Operational strength alone is no longer enough. Resilience, made measurable, is what keeps a company bankable, buyable, and buildable.
Call to Action: The Discipline Dividend
Tight cycles separate effort from evidence. When money was cheap, almost any business could look like a safe bet. When the cost of capital rises, lenders and buyers look harder. What they are really searching for is proof that the company’s strength is not a story but a system.
This market is not hostile. It is honest. Owners who can show resilience—clear books, tested decisions, predictable cash—will still raise money and close deals. Those who build discipline into how they plan and invest will find that credibility travels further than optimism.
Now is the time to make your systems visible. Write down how capital gets deployed, how you adjust when pressure hits, how your team measures risk and reward. Build the habits before the next up-cycle so you can use them when it arrives.
The companies that do this will define the next phase. They will stay bankable when credit tightens, buyable when markets reopen, and buildable through every turn that follows.