As appeared in the Asset Based Finance Journal

Many non-bank finance companies obtain their initial credit facilities from friends and family or, occasionally, from a family office. These early-stage credit lines—typically in the $5 million to $10 million range—are often lightly documented and lack many of the term sheet elements found in institutional facilities. Companies may use these arrangements for one to three years to build a track record and validate their lending strategy and performance. Eventually, as they seek to scale, they require larger facilities and turn to institutional capital providers.

Getting Started

To approach an institutional provider, a company must first prepare a comprehensive corporate deck. It need not be overly polished, but it should clearly convey key information about the company’s management team, history, performance metrics, origination strategy, underwriting and servicing processes, and—most importantly—product details, including unit economics.

Given the variety of niche lending products in today’s market, especially in the commercial sector, it is essential to describe receivables clearly—who owes whom money, why, and on what terms. Complex products can quickly lose a lender’s attention, so clarity is critical.

Avoid using the same presentation created for equity investors. Instead, tailor your materials to address a lender’s perspective: their upside is limited, while their downside is substantial. Focus on demonstrating how you will protect their capital, emphasizing servicing policies, oversight procedures, and risk controls.

In addition to a corporate deck, provide a loan tape and a payment tape. The loan tape should include data fields such as origination date, loan amount, interest rate, outstanding balance, last payment date, term, current status, location of obligor, and any other material attributes. The payment tape should detail every payment received, including date, amount, and allocation. Include a data dictionary explaining all codes, column headings, and non-obvious terms.

Also provide historical and current financial statements, noting any significant changes or unusual items, and disclose any planned equity raises. While institutional facilities are typically asset-backed, lenders want confidence that the originator is financially stable and capable of servicing the assets while executing its growth plans.

Common Term Sheet Elements

Once underwriting and diligence are underway, the lender will eventually present a term sheet. The following elements commonly appear in institutional warehouse lines but may surprise companies used to simpler “friends and family” facilities.

Use of SPVs
Institutional facilities are typically structured as securitized warehouses rather than direct loans to the originator. Receivables are transferred to a special-purpose vehicle (SPV)—usually wholly owned by the originator—which serves as the borrower. Because emerging lenders are often less creditworthy than their receivables, segregation in a bankruptcy-remote SPV is required. Lenders also require legal opinions confirming the validity of the transfer and the SPV’s independence.

Deposit Account Control Agreements (DACAs)
Lenders will require DACAs on servicing and collection accounts to control cash flows from obligors. Without this control, the SPV structure alone offers limited protection. Together, the SPV and DACAs ensure that receivables can self-liquidate for the lender’s benefit in an event of default.

Borrowing Bases and Concentration Limits
The borrowing base determines how much the lender will advance against the portfolio at any given time. It is calculated as the value of eligible receivables multiplied by the advance rate, less any excess concentrations. Lenders typically impose concentration limits—such as by geography, credit grade, or receivable size—to maintain portfolio diversification consistent with the originator’s historical performance.

Because of these limits, the effective advance rate may be lower than the stated rate in the documents. When comparing term sheets, model your borrowing base using your current portfolio to understand the true advance level; the highest stated rate is not always the best deal.

Prepayment Penalties
Initial institutional facilities rarely exceed $25 million, even when replacing a $7 million “starter” line. Since lenders invest substantial time and effort in helping originators become “institutionally ready,” they want assurance that the facility won’t be refinanced immediately. Expect prepayment fees—often structured as make-whole payments or fixed percentages. These can sometimes be negotiated as to term or amount but are rarely eliminated entirely.  Ultimately it’s important to consider the lender’s total economics it may earn on these smaller transactions relative to the upfront effort they put in.

Bad Acts Guaranties
Most smaller, privately held originators have limited control parties. Lenders therefore require bad acts (or “bad boy”) guaranties from significant owners or executives. These cover losses arising from fraud, willful misconduct, or interference with collateral and the lender’s security interest—not credit or market risk. In other words, lenders accept economic risk but not malfeasance risk. Avoid such conduct, and the guaranty will never come into play.

Back-Up Servicers
Institutional lenders also require a back-up servicer to stand ready to assume servicing duties if the originator fails. This is typically a “warm” arrangement, in which the back-up servicer periodically receives portfolio data but remains inactive unless needed.

Pro Tips

• Engage experienced counsel. While your long-time business attorney may be trusted and cost-effective, institutional warehouse financings involve complex structured finance documentation. Using counsel without relevant experience can extend timelines and ultimately increase costs.
• Seek temporary expertise if needed. Smaller companies often lack a full-time CFO or capital markets specialist. Engaging an advisory firm, broker, or experienced contract professional (even on a short-term or 1099 basis) can greatly smooth the process and improve outcomes.

Final Thoughts

Securing your first institutional warehouse line marks a pivotal step in a company’s growth. Understanding the key structural elements, preparing thoroughly, and engaging experienced partners can make the difference between a drawn-out, difficult closing and a smooth, scalable financing relationship with the existing lender and beyond.