Article By Eric Abramovich, Co-Founder and Chief Credit Officer, Roc Capital
References to lending can be found in the Holy Books, so we can only assume that private lending is as old.
While the general concept has largely remained the same – there is a lender, a borrower, a principal loan amount, and interest to be repaid, the mechanics of lending have certainly changed over time. Prior to the institutionalization of private lending for real estate investor loans, they were often syndicated and crowd funded by local lenders using capital from friends and family. The entrance of Wall Street-backed capital providers into the space brought services previously only available in the substantially larger markets for consumer and commercial mortgages.
What is Table Funding?
“Table funding” commonly refers to the funding of a loan whereby one lender, typically a larger capital provider, provides its balance sheet to another lender, typically a smaller third-party originator. While table funding need not always preserve the brand identity of the third-party originator to the borrower, capital providers that have perfected their craft are able to do so through a practice commonly referred to as “white labeling.”
Today, white labeled table funding has become the gold standard for private lenders providing a balance sheet-lite funding solution. In a typical example, private lender ABC Funding LLC submits a loan to Capital Provider XYZ and XYZ funds the loan in the name of ABC’s lending entity. The loan is then assigned to XYZ in a back-to-back transaction. In certain states, licenses are required for the capital provider and/or the lender, so it is important to consult with a knowledgeable attorney familiar with state-by-state restrictions and licensing requirements.
A lender has many alternatives to engaging with a capital provider that provides table funding. These range from obtaining bank financing or leverage, syndicating a loan, or simply funding a loan with cash. However, the most comparable alternative to table funding is arguably for the lender to fund the loan and then sell it to a capital provider in the secondary market. This type of capital provider is often referred to as a note or loan buyer. Whereas table funding capital providers typically have substantial infrastructure and technology to help the lender process, underwrite, close, and service a loan, note buyers generally have a substantially pared down offering of services limited to buying pools of loans at some regular interval.
The Risks and Benefits of Table Funding v. Selling Loans
It is important for lenders to make an informed decision that balances their benefits, risks, and needs under each of the foregoing funding alternatives.
The Benefits of Table Funding
With table funding, a lender typically requires little to no cash to fund a loan with minimal overhead, technology, or infrastructure. Sophisticated table funders also provide strong brand and identity protection. Since the table funder is involved in underwriting the loans, they assume most of the funding risk, and consequently, the lender generally need not provide legal representations and warranties (“reps and warranties”) typically involved when selling loans. Lenders that transacted through COVID-19 quickly came to understand the very real risk presented by potential loan buybacks.
The Benefits of Note Selling
Given the benefits of table funding, it might seem inadvisable to consider selling loans, yet there are other factors to consider. While table funders offer substantial infrastructure, lenders need to operate within the rules set by such capital providers. This can slow the transaction process down, and lenders sometimes have a hard time giving up some level of control. Also, since note buyers tend to have far less infrastructure and support to offer a lender, their cost of capital may be lower. In essence, the note buyer relies on the underwriting and processes of the lender and ensures conformance to their note buying guidelines through contractual obligations and reps and warranties.
If you are in the market for a car, you can choose between the least expensive option, which typically has a manual transmission, crank windows, and bare bones features that get you from point A to B. You can also choose an expensive luxury self-driving electric car with the latest technology, automation, and safety features. In the former, you have more control of the car, whereas, in the latter case, you might need to surrender more to the car. A lender should consider its particular needs and circumstances, legal and otherwise, when deciding upon a funding alternative.
Roc Capital, the flagship in Roc360’s vertically integrated financial services platform for real estate investors, offers white labeled table funding for over 400 private lenders and has funded over $7 Billion in residential real estate investor loans since 2014.