Broadgate Corporate Finance Blog

What exactly is lender finance?

Lender finance is an all encompassing area that incorporates all areas of capitalization for small and medium-sized finance companies. Many don’t realize that finance companies aren’t simply endless pools of capital that can make loans and leases however they see fit. Finance companies themselves are often in a careful balancing act between the loans they make and the debt and equity that they take on in order to make them. When a finance company formulates a solid capitali­zation strategy, it is able to create quicker and more sustainable growth.

Approaching lender finance, one often looks at equity strategies first. Many smaller finance companies will rely upon equity placed directly in the company by principals and small individual private investors. Larger finance companies can begin using strategies that involve raising capital from insti­tutional investment groups, hedge fund of funds, and in some cases even public markets. Capitalizing through equity can present several challenges such as locating the right group who is will­ing to make the investment despite their lower gross rates of re­turn and securing the capital fast enough to keep pace with loan de­mand.

This leads into the second strategy that finance companies use, debt capi­talization. Finance companies often will seek debt capital because it is ob­tained more quickly and because groups willing to provide it are more read­ily at hand. Debt capital is usually provided in the form of a line of credit that the company can draw upon as it makes its loans. Some of these facili­ties are warehouse lines that can be used on a short-term basis be­fore loans must be purchased by investors. Others are senior-secured credit facilities that the company can use to harbor loans on an indefinite basis as long as the loans maintain eligi­bility requirements. With both of these types of credit facilities, the company must maintain an equity margin between 10% - 20% on each loan that it makes.

posted by Michael Anders @ 1:17 PM