Venture lending with warehouse lines: Three considerations to protect your position

Fintech originators such as alternative lenders, buy-now-pay-later platforms, and payments companies typically fund daily originations through subsidiary-level special purpose vehicle (SPV) warehouse credit facilities. At the same time, these companies often layer in traditional venture debt at the parent level to support growth initiatives and extend runway. This bifurcated structure can create intercreditor friction between lenders, given overlapping claims on the loan parties’ assets and differing enforcement priorities.

This alert highlights three focus areas for venture lenders to consider for mitigating risk in these dual-lender structures:

• Limiting the warehouse lender’s recourse to the parent company,


• Coordinating default triggers and enforcement rights to protect the venture lender’s position, and


• Limiting the “control” impact of pledges of the SPV’s equity interests (stock or LLC membership interests) to the warehouse lender while preserving residual SPV equity value for the venture lender.

Limiting warehouse lender recourse to the parent company

For a venture lender financing a fintech company that originates assets through an SPV warehouse facility, the paramount objective is to limit the warehouse lender’s recourse against the parent company (that is, the venture lender’s borrower). Ideally, from a venture lender’s perspective, the warehouse lender’s claims should be confined to the SPV and its assets, so that the parent is not exposed to the SPV’s obligations. In practice, however, warehouse lenders often require some form of parent guaranty or other credit support. Venture lenders are encouraged to scrutinize these provisions carefully and establish guardrails, ensuring that such recourse remains structurally ring-fenced at the SPV level, and that any guaranty is narrowly tailored in scope, duration, triggers, and remedies.

Common types of parent guaranties: There are two prevalent forms of parent guaranty in warehouse financings: a “bad acts” guaranty (sometimes called a limited-recourse or “bad boy” guaranty) and a “payment” guaranty.

A bad acts guaranty is most common. Under it, the parent company agrees to be liable only for losses arising from specified wrongful acts or omissions by the parent or the SPV. These “bad acts” typically include, among other things, (1) fraud or willful misconduct, (2) misappropriation of funds, (3) the parent causing or consenting to the SPV’s voluntary bankruptcy or insolvency proceedings, (4) unauthorized transfers or pledges of SPV assets, and (5) material breaches of separateness covenants or eligibility/repurchase requirements that impair the collateral. This type of guaranty should be narrowly tailored. It is not a guarantee of the credit performance of the underlying loans, but a remedy for specified misconduct at the parent level that in turn affects the warehouse collateral or the warehouse lender’s rights.

A payment guaranty is less common and, when provided, is capped at a small, fixed percentage (typically, ten percent) of the committed amount of the warehouse facility, often with negotiated sunsets, step-downs, and specified carve-outs. It functions as a limited safety net: If the SPV fails to pay, the parent is obligated to cover amounts only up to the cap. This structure affords the warehouse lender measured recourse to the parent (which is usually the operating entity generating revenue) while constraining the parent’s exposure. The cap mechanics should be precisely drafted to avoid unintended growth of the exposure through amendments, basket sharing, or accrual of default interest beyond the cap.

Coordinating default triggers and enforcement rights

A second major area for risk minimization is the coordination of enforcement rights between the warehouse lender and the venture lender – specifically, aligning when a default under the warehouse facility will trigger a default under the venture loan. Venture lenders need the ability to act swiftly if the borrower’s loan portfolio financing encounters stress, because the parent’s business model typically depends on uninterrupted access to capital for new originations. Parent borrowers, by contrast, will seek to avoid a cascading default risk where a technical or contained issue at the SPV precipitates a default at the parent level. Negotiating the right cross-default provisions and enforcement terms is a delicate balance. The following approaches are common in the market and can be tailored to fit the parties’ risk tolerances.

1. Full cross-default (venture lender-friendly): The most protective approach for a venture lender is to stipulate that any default under the warehouse facility immediately triggers a default under the venture loan. Under this “pure” cross-default, any breach – whether a covenant default, a borrowing base deficiency unremedied within its contractual cure period, a payment default, or any other defined default – permits the venture lender to declare a default at the parent level and exercise remedies. The principal benefit is maximum early warning and optionality: The venture lender can accelerate, negotiate from a position of strength, and participate in any SPV-level workout at the earliest sign of deterioration before collateral performance or market conditions worsen.

2. Selective cross-default on major events (middle ground): A compromise approach narrows the cross-trigger to certain specified, material events at the warehouse facility, while excluding technical or transient issues. Under this middle-ground arrangement, the venture loan agreement would list specific serious events at the warehouse facility level that would cause a default for the parent loan. Typically, these would include critical payment defaults (eg, the SPV failing to pay the warehouse lender or hitting a hard cap on the borrowing base), or bankruptcy/insolvency events related to the SPV. If one of those major events occurs, the venture lender can immediately declare a default under the venture debt documents. In such arrangements, venture lenders will typically push for a cross-acceleration right for the other events of default, triggered upon the warehouse lenders’ acceleration of obligations or exercise of remedies with respect to the collateral.

Corporate structure: Mitigating SPV equity pledges to warehouse lenders

Venture lenders financing fintech borrowers frequently confront corporate structures that can impair collateral value and enforcement in a downside scenario. A recurring issue arises where the parent company directly pledges the equity of an SPV to a warehouse lender. Warehouse lenders typically require, in addition to a lien on the SPV’s assets, a pledge of the SPV’s equity by its parent to facilitate control, foreclosure, and potential sale of the entity if performance deteriorates. Where the parent company owns the SPV and has pledged the SPV equity to secure the warehouse facility, the venture lender may be contractually or practically blocked from realizing residual equity value in a downside scenario. Because venture loans often require the parent to pledge equity in substantially all subsidiaries, a prior or exclusive first priority pledge of SPV equity to the warehouse lender can leave the venture lender with only a junior or limited pledge, or none at all, diminishing collateral coverage and potential recoveries.

Amendments to the warehouse loan documents/intercreditor agreements: Where SPV equity must secure the warehouse line, venture lenders can mitigate risk through targeted amendments to warehouse loan documents and intercreditor arrangements. Key protections include: (1) standstill periods delaying foreclosure on the SPV equity; (2) notice and cure rights enabling the venture lender to repay or refinance the warehouse line, or potentially a buy out right; and (3) covenants limiting distributions to SPV equity holders, additional SPV level indebtedness, and amendments to the warehouse facility that would increase risk to the parent or subordinate creditors. Turnover provisions should direct residual distributions to the venture lender after warehouse obligations are satisfied. Ring fencing and use of proceeds covenants, along with strict SPV formalities, should also limit asset types, reinforce servicing standards, and hardwire waterfall protections to preserve the SPV’s purpose and reduce leakage. Documentation should clarify that, after satisfying warehouse obligations and subject to agreed triggers, excess spread and residual cashflows may upstream to the parent, preserving incremental value for the parent and its lenders.

In addition, the venture lender may seek a junior pledge of the SPV equity or the right to obtain an unrestricted pledge once the warehouse facility is taken out through securitization or sale. The venture lender should conduct diligence and structure against collateral destructive triggers by ensuring that foreclosure on SPV equity does not inadvertently cause material contract terminations, regulatory breaches, or impairment of critical intellectual property. Robust, periodic reporting on warehouse performance metrics, such as triggers, borrowing base composition, collateral performance, and covenant compliance, enables proactive risk monitoring at the parent level.

Where SPV equity consists of LLC interests, address Article 8 opt in status and whether interests are certificated. Absent Article 8 status (and if not held through an intermediary), LLC interests are “general intangibles” perfected by UCC 1 filing with first-to-file priority. Operating agreement transfer restrictions and issuer/member consents can still affect practical enforcement.

Parent-level warehouse originations

When the fintech borrower’s underlying loans are originated at the parent level and later sold to the SPV for financing by the warehouse lender, additional safeguards are often needed to prevent leakage and dilution of the venture lender’s collateral. Venture lenders are encouraged to consider strategies involving minimum purchase prices and limited repurchases.

Minimum purchase price: Because the parent typically sells assets to the SPV at a discount – thereby reducing the immediate value of the venture lender’s collateral pool – the venture lender should prohibit any sale that fails to meet both of the following: first, a minimum purchase price threshold, usually expressed as a percentage of the asset’s face amount; and second, payment of the purchase price in cash substantially contemporaneous with the transfer. Although a venture lender may occasionally permit a portion of the purchase price to be treated as a deemed equity contribution to the SPV, only cash proceeds should count toward the minimum purchase price, given that the warehouse lender will have a senior lien on the SPV equity. The venture lender may also reserve the right to prohibit all sales following a default under the venture facility; however, borrowers typically resist this construct on the basis that abruptly halting sales to the SPV may cause the business to fail.

Limited repurchases: The venture lender should broadly restrict the parent’s ability to repurchase assets previously sold to the SPV, allowing repurchases only in narrowly defined circumstances, such as breaches of time of sale representations and warranties (for example, asset authenticity or compliance with specified origination policies). If not carefully drafted, repurchase obligations tied to nonperformance can operate as a de facto guarantee of the warehouse facility by the parent, shifting ultimate collectability risk from the SPV back to the parent. Repurchase triggers in the SPV warehouse financing based on payment defaults, borrowing base deficiencies, credit deterioration, delinquency, or similar performance-based criteria are particularly problematic for the venture lender and should be addressed in negotiations – preferably eliminated, or at least limited to true time of sale breaches – to avoid back door credit support of the warehouse facility.

Conclusion

Venture lenders can support fintech growth while protecting collateral value by limiting the warehouse lender’s direct reach to parent level assets, clearly defining defaults and remedies across the capital stack, and mitigating the adverse effects of SPV equity pledges through carefully negotiated intercreditor and warehouse terms. Precision in drafting, disciplined ring fencing, and ongoing transparency preserve residual value and enforceability without unduly constraining the borrower’s operations.

For more information, please contact the authors.