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Warehouse lending is a form of investment that’s becoming more relevant for investors looking to preserve capital and generate regular income - particularly at higher rates than traditional term deposits or with lower risk and volatility than property development or equities.
At its core, warehouse lending is the institutional funding that sits behind a non-bank lender. These lenders range from specialists in equipment or vehicle finance to consumer lenders & fintechs, need working capital to provide loans. Payments from these loans are then applied to service and repay the warehouse facility.
For many of these businesses, banks aren’t an option - at least not until they hit significant scale. For example, Zip (founded by Eldium’s co-founder, Larry) only got a bank warehouse when it had $200m of receivables. So they turn to more flexible private investors or credit funds to establish these warehouse facilities. In the case of funds such as Eldium, we often take security over the entire operator’s business (goodwill, other assets etc) and have specific requirements & covenants to ensure the facility’s risk is managed.
Characteristics of Warehouse Lender
Warehouse lending typically involves:
- Exposure to a diversified pool of loans rather than a single borrower or project
- Returns generated from underlying loan performance, often paid monthly
- Risk protections through structural features like minimum cash covenants, equity cushions, and eligibility criteria
- Security over the receivables or physical assets being funded (e.g. vehicles, invoices, property), and often the actual lender’s entire business as well.
How it compares to other private credit
Compared to other forms of private credit, like direct property development finance, warehouse lending often carries lower LVRs and more frequent cash flow. It’s also less reliant on a single asset exit event, which can be delayed or revalued. Instead, warehouse investors receive income as the underlying loans are repaid by borrowers on a rolling basis.
An emerging option
In Australia, warehouse lending is gaining momentum as more lending businesses emerge to serve sectors underserved by incumbent banks. At the same time, some investors are exploring this space as an alternative to idle capital sitting in low-yield accounts, or to balance exposure to longer-duration property or equity investments.
As with any asset class, it comes with risks and complexities. But for those interested in understanding where credit markets are evolving - and how capital reaches the real economy, warehouse lending is an area worth watching.