How do leverage limits affect lending? We examine a regulatory change to the business development company (BDC) lending sector, which allowed lenders to double their regulatory leverage constraint. Exploiting the staggered timing of approvals, we show that this allowed lenders to slowly adjust loan portfolios and increase leverage, but suddenly increase the unrealized losses reported on their loans. These patterns around approvals suggest that the slackness of regulatory constraints has important effects on lenders’ incentives to accurately assess fair value. In addition, we explore how BDCs that were close to or far from their leverage limits fared in 2020, and find similar results for valuations, as well as evidence that leverage limits affect credit supply. Our results shed light on an important lending sector for small businesses, which has grown dramatically since the Great Recession.