Lender Finance is a type of debt financing provided by a few select banks and private credit funds to non-bank lenders and specialty finance companies that then use the funds to originate loans to their own borrowers. In the 16 years since the Great Recession, many banks have continued to tighten lending standards leaving many consumer and commercial borrowers underserved. As a result, we have seen significant growth among non-bank lenders, particularly those that have embraced technology, in order to focus their business operations on targeted sectors and attract credit-worthy borrowers.
Those of us engaged in Lender Finance often find it challenging to describe this subset within the broader Private Credit sector and also to differentiate it from other types of asset-based lending (such as receivable, inventory, and equipment financing for a single corporate). I like to think of Lender Finance first and foremost as “wholesale credit,” meaning we provide credit to other credit providers or to a company that is otherwise generating a pool of financial assets. (In this latter case, as opposed to lending, the company may be factoring receivables or purchasing or advancing against future receivables as is the case with Merchant Cash Advance funders or Litigation Finance companies.)
The types of loans made by specialty finance companies are endless. Beyond the more mundane auto loans, unsecured consumer loans, and small business funding are niche lending products such as loans for elective medical procedures, purchase order financing, solar installation loans, real estate fix and flip loans, litigation finance and more.
How are Non-bank Lenders Funded?
Unlike banks, which have the luxury of cheap deposits and access to the Federal Reserve system, non-bank lenders must seek funds elsewhere and carefully manage the liability side of their balance sheets. So where do non-bank lenders get their funding?
Non-bank Lenders and Specialty finance companies typically have three ways of funding their originations:
- Selling loans or receivables they originate to investors in forward-flow arrangements. Typically these arrangements are committed and the investor provides a specified “buy box” describing the eligibility criteria and loan characteristics for the loans they are willing to purchase;
- Obtaining a “warehouse” line of credit to temporarily house the assets they originate until they can aggregate to a level suitable for a bulk sale or securitization of the loans; and
- Obtaining a revolving line of credit where the loans or receivables are permanently housed and eventually self-liquidate, without the requirement of a take-out by some other financing.
Historically, warehouse lines allowed assets to be held only, say, sixty to ninety days – thus the term “warehouse” was used to imply a place for only “temporary storage” just as in the case of brick and mortar warehouses. The idea was that an asset comes into the warehouse but is eventually shipped out. Nowadays the term is used to describe about any credit facility whether it is used for either the temporary funding of loans or to permanently fund loans that will term-out or self-liquidate within the facility.
We are all well aware of the nearly trillion dollar annual issuance of rated and cusip’d asset-backed securities. But it may surprise you to know that there is a tremendous amount of loan volume originated by specialty finance companies and fintech lenders that is never securitized. This volume is financed by a handful of select banks and credit funds.
Many terrific niche specialty finance companies will never securitize their originations. The reason relates to volume. In order to securitize, an issuer generally needs to amass a roughly $100 million to $200 million portfolio in order to justify the time and expense of conducting a rated term ABS issuance. So that is the first hurdle. But even if a company could pull that off, many investors only want to put the time and effort into approving a deal if there will be repeat issuances… if not quarterly, at least annually. So the specialty lender annually originating $25 million – $75 million of loans for elective surgery, backyard sheds, used motorcycles, or small businesses will likely never grace the front page of a private placement memorandum. It is these companies’ loan portfolios that fill buckets within the credit funds like Revere that are active in the Lender Finance sector.
The primary focus of Revere’s Specialty Finance practice is Lender Finance. We are oftentimes the first or second institutional capital providers that our non-bank lender clients’ obtain, as we will provide credit facilities as small as $10 million. We are willing to roll up our sleeves and partner with them in helping them prepare for scale by getting them “institution-ready” in terms of data management and reporting. We often help them grow by providing larger commitments up to the $50 million range and then bid them farewell as they transition to the bank market or to larger credit funds in the space.
The Specialty Finance team at Revere Capital has decades of experience in this unique space. Our sophisticated approach to asset management and underwriting allows us to provide the much-needed capital and liquidity to this sector.
To learn more about our Specialty Finance strategy, visit https://www.reverecapital.com/strategy/specialty-finance/ or contact us directly at originations@reverecapital.com.