Conduit Financing

Learning finance? Good…you “can-du-it.”

In the world of finance, conduit financing involves a firm that helps investors to offer capital for a commercial loan.

Since commercial loans for apartment buildings, shopping centers, and office buildings are usually much larger than residential loans, conduit lenders help to get the money quickly to a borrower as an initial loan, while they recruit investors to provide the final funding.

In another type of conduit funding, state and local governments issuing municipal bonds might use the proceeds to fund a third-party-managed project, such as a new hospital, airport, or housing. This third party would pledge the future revenue from the project to pay back the bondholders.

Before the Great Recession of 2008, banks got in trouble for selling short-term debt through conduits so they could purchase credit card receivables, student and auto loan debts, and mortgages. When the short-term maturity date arrived, they would issue new debt to pay off the old debt. This practice generally came to a halt after they defaulted on a few too many loans.