What Is Conduit Financing?

Conduit financing is a type of lending arrangement in which a government entity will issue securities as a means of providing the financing for a project that is launched and managed by a non-profit organization. In some instances, a private company can also make use of conduit financing to raise money for a non-profit project, if that private company meets the criteria set by governmental regulatory agencies for this type of financing strategy. The agency arranging the financing usually does not carry any liability for the securities issued, meaning that any profits received by investors are based on the revenue generated by the project itself.

Typically, the securities issued as part of a conduit financing strategy will provide benefits at a fixed rate of interest. Two of the more common types of securities that may be used with this type of financing are bond issues and certificates of deposit. At specific intervals during the life of the project, investors receive compensation in the form of interest, with a payment either being issued at that time or the amount accrued for final disbursement at the time the security reaches full maturity. The generation of some type of gain from the investment will be based on the revenue stream generated by the project itself, meaning that in the early stages, the amount of interest earned may be somewhat low.

Unlike other types of investment opportunities, conduit financing does not involve any type of guarantee of payment by the entity that actually arranges the opportunity. For example, the government entity that sets up the investment on behalf of a non-profit agency launching a project assumes no liability for the outcome. Instead, the responsibility for honoring the terms of the investment agreement rests with the non-profit agency. In order to minimize the risk, it is not unusual for the agency overseeing the project to secure some sort of insurance coverage that protects the interests of the investors on the off-chance the project fails to generate sufficient revenue to settle the obligation.

As with any type of investment activity, it is important to research the background of any conduit financing opportunity. This includes understanding the background of the non-profit agency involved, the anticipated return from the investment, and the terms associated with the issuance of interest payments and final settling of the entire amount at the time of maturity. Doing so will aid the investor in deciding if the potential returns are worth the time and effort required to participate in the financing arrangement.