What Is Transactional Funding and How Does It Work?

Transactional funding is a short-term financing method that provides capital for an intermediary to purchase an asset with the immediate intent of reselling it to another buyer. This financial tool is useful when speed is essential and traditional financing options are too slow or impractical. Its purpose is to bridge a temporary funding gap, allowing a deal to proceed without the intermediary needing to use their own long-term capital.

Understanding Transactional Funding

Transactional funding operates on a principle known as a “back-to-back” or “double closing,” where two separate transactions occur in quick succession. An intermediary, often referred to as Party B, first purchases an asset from an original seller (Party A) using the short-term loan. Party B then sells the same asset to a pre-arranged end buyer (Party C).

The transactional lender provides 100% of the funds needed for the A-B transaction, allowing Party B to take ownership. The loan is then repaid, typically within hours or days, using the proceeds from the subsequent B-C sale to the end buyer. This ensures the lender’s funds are tied up for a minimal period, reducing their risk.

This financing structure requires precise coordination between all parties: the original seller, the intermediary, the end buyer, and the transactional lender. A title company or closing agent often handles both closings, ensuring seamless and legal transfer of ownership and funds. Transactional funding acts as a temporary bridge loan, allowing the intermediary to execute a purchase and sale almost simultaneously.

Common Applications

Transactional funding is primarily used in the real estate sector, especially in strategies like real estate wholesaling. In wholesaling, an investor identifies a distressed or undervalued property and contracts to purchase it from the seller. They then quickly find an end buyer, usually another investor, willing to pay a higher price for the property.

Transactional funding allows the wholesaler to complete the initial purchase from the original seller without deploying their own capital. This is useful when direct contract assignment is not permitted or when the wholesaler wishes to conceal their profit margin from both the original seller and the end buyer. Funds from the end buyer’s purchase immediately repay the transactional loan, and the wholesaler earns the difference between the two sale prices.

While real estate wholesaling is the most common use, similar short-term, simultaneous transactions in other asset classes could benefit from transactional funding. The suitability of this funding hinges on the ability to swiftly resell the acquired asset to a ready buyer. Its speed and minimal upfront capital requirements make it a fitting solution for quick-turnaround deals.

Key Characteristics and Considerations

Transactional funding has an extremely short duration, often lasting only hours or a few days. While some lenders may offer terms up to 14 days, the typical repayment period is within 24 to 72 hours. This short timeframe minimizes the lender’s risk and distinguishes it from longer-term financing options.

Costs for transactional funding are typically structured as flat fees or a percentage of the loan amount, rather than traditional interest rates. These fees can range from 1% to 12% of the total loan, with some lenders charging a processing fee of $1,000 to $1,795. Because the loan term is brief, the overall cost is generally lower than if traditional interest accrued over weeks or months.

A prerequisite for transactional funding is a confirmed end buyer for the asset. Lenders require proof, such as a signed purchase contract, to ensure immediate loan repayment. This asset-backed, deal-specific nature means a borrower’s personal credit score or income verification is often not a primary factor for approval. The focus is on the viability of the two-part transaction itself. A clear title on the property is usually required to ensure a smooth and rapid closing process for both transactions.