What Is a Warehouse Line of Credit?

A warehouse line of credit is a specialized financial tool. It functions as a revolving credit facility, providing short-term capital. Businesses utilize this financing mechanism to bridge funding gaps that arise when they need to acquire or originate assets before those assets can be converted into long-term funding or sold to another party. This type of credit is distinct from general business lines of credit due to its asset-backed and transactional nature. It serves as a temporary funding solution, allowing companies to maintain operational liquidity and pursue opportunities that require upfront capital.

Understanding a Warehouse Line of Credit

A warehouse line of credit is a revolving credit facility extended by a financial institution to a borrower, typically a company that originates assets. Its fundamental nature allows the borrower to draw funds, repay them, and then draw again, similar to a traditional line of credit. The primary purpose of this facility is to provide interim financing for highly liquid assets. These assets are held temporarily before being sold or refinanced.

This financial instrument is secured, backed by the assets being acquired or originated. For instance, a lender might use a warehouse line to fund loans they originate, using those newly originated loans as collateral. The facility essentially creates a pool of accessible capital, allowing businesses to fund their operations without relying solely on their balance sheet. It acts as a crucial link in the chain of financial transactions, ensuring continuous access to capital for specific, short-term needs.

Operational Mechanics

The operation of a warehouse line of credit follows a systematic, cyclical pattern that facilitates continuous business activity. When a company, such as a mortgage originator, needs to fund a new asset like a mortgage loan, it draws funds from its established warehouse line of credit. The loan documentation for the newly originated asset is then typically sent to the warehouse lender, serving as collateral for the drawn funds.

During the period the asset is held on the warehouse line, known as “dwell time,” the originating company prepares the asset for its eventual sale or conversion. For mortgage loans, this often involves packaging them for sale to investors in the secondary market, such as government-sponsored enterprises or private investors. Once the asset is sold, the proceeds are immediately used to repay the outstanding balance on the warehouse line of credit. This repayment replenishes the available credit, allowing the company to draw funds for new assets and restart the cycle. The ongoing management of collateral and timely reporting to the warehouse lender are crucial components of maintaining the health and availability of the line.

Key Features and Terms

Warehouse lines of credit are characterized by several specific features and contractual terms that define their structure and cost. A fundamental element is the overall credit limit, which establishes the maximum amount of funds a borrower can access. Within this limit, there may be sub-limits for different types of assets or specific transactions. The duration for which assets can be held on the line, known as the “dwell time,” is typically short, often ranging from 10 to 60 days for mortgage loans, with an average of around 15 days.

Interest rates on warehouse lines are commonly floating, fluctuating based on a benchmark rate like SOFR, plus an additional spread determined by the borrower’s risk profile. Borrowers may also incur various fees, including commitment fees for the unused portion of the line, administration fees, and collateral review fees, which compensate the lender for managing the facility. An important term is the “advance rate,” which specifies the percentage of an asset’s value that the warehouse lender will fund. This rate commonly ranges from 97% to 100% of the asset’s value.

Typical Users and Applications

Warehouse lines of credit are predominantly utilized by businesses that require short-term, revolving capital to fund specific, high-volume transactions before those transactions are finalized with long-term financing or sale. Mortgage lenders and independent mortgage banks are primary users of these lines. They use warehouse lines to fund newly originated mortgage loans, holding them temporarily until they are sold to investors in the secondary market, such as Fannie Mae, Freddie Mac, or other private entities.

Beyond the mortgage industry, other sectors also leverage warehouse lines. Distributors, retailers, and wholesalers, for example, may use these facilities to finance their inventory. They can borrow against the value of goods they have purchased, using the funds to cover operational costs until the inventory is sold to customers.