The Exit Strategy Is The Real Serviceability Test 

In traditional lending, serviceability is often the headline question.

Can the borrower afford the repayments over 20 or 30 years?

Private credit is different.

We’re not providing a 30-year mortgage. We’re typically providing a short-term solution for six, 12 or perhaps 18 months.

That changes the question completely.

Instead of asking:

“Can they service this loan for the next 30 years?”

We’re asking:

“How are they going to repay us in the next 6–12 months?”

That’s why the exit strategy is one of the most important parts of any private credit scenario.

At Arc, a structure might involve 12 months of prepaid interest with a six-month minimum term. If the borrower exits after six months, the unused prepaid interest can be refunded.

Alternatively, we might structure six months prepaid followed by monthly interest payments. Where ongoing servicing is required, an accountant’s certificate may be needed to demonstrate that the borrowing entity can meet those payments.

For an established business with trading history, that can be relatively straightforward.

For a newly established entity, like a Special Purpose Vehicle (SPV) for a project, it can be much harder.

That’s where structuring the loan around the exit becomes critical.

We Want Two Exits

A strong private credit scenario should ideally have:

A primary exit strategy.
For example, refinancing into longer-term bank or non-bank debt once the borrower has updated financials, resolved a temporary issue or completed a business plan.

A secondary exit strategy.
For example, selling an investment property or another asset if the refinance doesn’t eventuate.

The backup matters.

Imagine a borrower has significant equity in a property but needs six months to get their financials in order before a bank will refinance them.

Without private credit, they might be forced to sell that property quickly to meet an immediate obligation.

A rushed sale can mean accepting a materially lower price.

Private credit can potentially give them time.

Instead of a fire sale today, they may have six or 12 months to refinance or, if necessary, market the property properly and maximise the sale price.

That is the role of short-term capital.

It isn’t supposed to be permanent debt.

It is a bridge from the borrower’s current position to a more sustainable position.

Rate Matters. But Exit Matters More.

On a 30-year mortgage, small differences in interest rates can translate into hundreds of thousands of dollars over the life of the loan.

That makes rate incredibly important.

But applying the same thinking to a six or 12-month private credit facility can miss the point entirely.

The bigger question is:

What problem does the capital solve, and what position will the borrower be in when the loan matures?

When brokers understand that, private credit becomes much easier to explain.

Don’t start with the rate.

Start with the exit.

Because in short-term private credit, the exit strategy is the real serviceability test.