What is a warehouse line of credit?
A warehouse line of credit is a loan companies take out in order to issue loans of their own. Put another way, it's the type of bank loan a lender would take out when they want the flexibility to scale up their lending operations.
The term originally comes from mortgages, where mortgage lenders often need short-term financing to close mortgage loans for their borrowers. The term "warehouse financing" makes sense when you learn that, after being financed, the mortgage loans were held in a "warehouse" for several weeks until they were sold on the secondary market.
These traditional warehouse lines of credit were typically short-term in nature, with a typical term of one year or less. Why? Because the mortgage loans that the line of credit funded would eventually be sold to investors. At that point, the mortgage originator would pay off the warehouse line of credit, or revolving credit facility.
What is fintech warehouse lending?
Fintech warehouse lending is a misnomer (as noted above, warehouse lending applies specifically to mortgages), but you'll sometimes see the concept of "fintech warehouse lending" or warehouse lines of credit applied to fintechs in reference to asset-backed credit facilities.
A "fintech warehouse lending" example, then, might be a startup's announcement that it has raised credit facilities from major banks.
In the past, we've written about how fintech cash flows work, or where financial technology companies like buy-now-pay-later (BNPL), charge/credit card, and factoring companies get the cash to fund their originations.
The idea is the same as with mortgages: a fintech might want to have the funds to be able to extend loans or finance its customers purchases, but it would prefer to do that with a revolving line of credit rather than tie up the funds on its balance sheet.
In that way, a fintech's credit facility with a bank or private credit provider is the bridge between the fintech front-end and back-end. It's a win for both the bank and the fintech: the bank gets to put money to work without having to stand up a consumer-facing front-end, and the fintech is able to scale up quickly.
What secures a warehouse line of credit?
In both "true" warehouse lines of credit and fintech warehouse financing, the financing is backed by the receivables of the mortgage lender or fintech company. In the case of a mortgage lender, the bank views the mortgage as the unit of collateral; in the case of a fintech, it's the BNPL receivable or credit card receivable.
It's the changing nature of the underlying collateral that makes managing warehouse lines of credit operationally complex. Each time a borrower draws funds from the revolving credit facility, it must put together a loan tape, borrowing base XLSX files, and other compliance documentation. If it gets any part of its calculations wrong, the lender is likely to delay its access to capital.
These and other operational risks can make managing warehouse lines of credit difficult for first-time borrowers.
Want to learn more?
Finley is private credit management software that helps companies with asset-backed loans save time and money by automating routine debt capital management tasks like borrowing base reporting, verification, and alerting. Today, Finley manages over $2 billion in debt capital for customers like Ramp, Parafin, and Arc. If you're interested in learning more about software that can help you streamline your debt capital raise and management, just request a demo or take a self-guided product tour. We'd love to chat!