As appeared in the Dallas Business Journal
Specialty Finance Lenders: The Support Behind Nonbank Lenders
When it comes to capital markets, issues like interest rates and the Federal Reserve receive considerable attention. That attention is warranted for traditional lenders, like banks and credit unions.
However, not all funding comes from traditional lenders. Nonbank lenders, including private debt funds, hedge funds, family offices and asset-based entities, have stepped in to provide capital to those entities that are underserved by banks or credit unions.
Nonbank lenders don’t generate funds for loans out of thin air. They rely on their own sources, investors and specialty lending firms.
Where the Capital Comes From
To understand the ins and outs of specialty finance lenders, it’s a good idea to compare where traditional and nonbank lenders get their capital.
On the banking side, the general belief is that loans come from customer account deposits. This is true, to an extent—but those deposits don’t generate enough of what’s needed for lending purposes. As such, traditional lenders generate capital from the following:
- Interbank borrowing
- The Federal Reserve’s Discount Window
- New loan creation (with interest rates used for additional lending)
Nonbank lenders cannot access the Federal Reserve Discount Window or attract government-guaranteed deposit accounts to leverage their capital for lending. While some private debt or equity funds obtain liquidity from traditional lenders, this is only part of the funding source.
As a result, the nonbank lenders increasingly rely on specialty lending companies like Revere Specialty Finance. These firms provide liquidity to nonbank lenders, that then offer capital to borrowers who might not either (i) qualify for traditional loans, or (ii) go through the time and effort required to obtain a traditional loan.
Specialty finance companies generate their capital in a few ways:
- Selling originated loans (or receivables) originated to investors in what’s known as “forward-flow” arrangements.
- Obtaining “warehouse” lines of credit, where assets are stored and aggregated until their value reaches a level for bulk sales or loan securitization.
- Utilizing revolving lines of credit in which loans or receivables are housed and eventually self-liquidate as the underlying loans amortize.
How Specialty Finance Lending Operates
In a traditional lending structure, the bank taps into its liquidity (gathered from the above-mentioned sources), examines a borrower’s credit score, financial information and assets, and then decides whether to lend to that individual or entity.
Nonbank lenders base their decisions on different criteria, including track record, previous relationships and future revenue projections. By the same token, specialty finance companies provide capital to these nonbank lenders based on the following conditions:
The worth of the nonbank lender portfolios. At Revere Specialty Finance, we frequently provide funding using the value of the borrower portfolios as collateral. Our diverse capital base consists of multiple portfolios based on geography, obligor or industry.
The value of the nonbank lender assets. Specialty finance companies can provide funding based on account receivables or equipment. Revere Specialty Finance has examined medical receivables and royalty payments, among other assets. We can work with the lender as long as there is a contractual cash flow.
The likelihood of future financing. For example, in litigation financing, the specialty finance company will provide capital to a private lender in exchange for a portion of the settlement.
The potential of future revenues. With revenue-based financing, a specialty finance company can provide capital in exchange for a percentage of a private lender’s future proceeds until repayment of the loan.
Why Specialty Finance is Growing
As long as there have been banks, there have been nonbank lenders. As previously mentioned there will always be credit-worthy borrowers (consumers and small businesses) that do not qualify for traditional bank loans or do not want to go through the bank loan process. However, the regulatory environment for banks has gotten more complex and level oversight of banks has consistently increased since the great financial crisis and then again after the SVB failure. As a result of these factors many traditional lenders are stepping back from providing capital, allowing nonbank lenders to increasingly picking up the capital slack.
While banks have reduced many forms of traditional lending, they have increased lending in support of private credit lenders. From a risk/return standpoint, many banks have determined that lending to private credit funds is a more efficient way to gain exposure to these markets. Furthermore, traditional lenders are also starting to make use of their nonbank counterparts, offloading higher-risk assets from their balance sheets to private debt funds and other nonbank lenders.
These trends mean more opportunities for the specialty finance sector, especially as nonbank lenders require more capital. For example, Revere Specialty Finance targets lower middle market nonbank lenders and is typically the first institutional capital these companies will receive. Since its initial investment in 2017, Revere Specialty Finance has funded more than $300 million of investments and established a dedicated investment vehicle supporting its Specialty Finance lending business.
Does Specialty Finance Have a Future?
In a word, yes.
While many are relieved that the Federal Reserve is backing off from its higher-for-longer interest rate strategy, concerns remain in the banking world. Deloitte’s 2025 banking and capital markets outlook reported the likelihood of “moderating consumer spending, a rising unemployment rate and weak business investment,” along with ongoing regulatory volatility and geopolitical issues.
This isn’t good news for banks; these issues could mean continued strict lending guidelines and capital concerns. But the Deloitte write-up also suggests that the nonbank sector isn’t going away. Businesses and people still need capital; if they can’t get it from traditional lenders, they’ll find other ways. Most reports indicate that growth in the non-traditional lending arena will continue for the next several years.
This also creates opportunities for specialty finance lenders. Nonbank lenders need capital for loans, and specialty finance lenders that plan ahead, support their niches and monitor capital trends will likely thrive in the near—to mid-term.