The era of cheap capital that defined much of the 2010s is over. As central banks across the globe raised interest rates aggressively between 2022 and 2024 to combat inflation, the ripple e ects have been felt throughout the financial ecosystem—nowhere more acutely than in the lender finance space. Whether you’re a consumer lender in Texas, a revenue-based lending platform in London, or a factoring business in Mexico City, the cost and structure of capital have changed dramatically.
This article examines how rising interest rates are reshaping lender financing across the United States, Canada, the United Kingdom, and Mexico. We analyze the implications across six core verticals: Consumer Finance, Real Estate Bridge Lending, E-commerce Lending, Revenue-Based Lending (RBL), Accounts Receivable (AR) Factoring, and Merchant Cash Advance (MCA).
To better understand the financial tightening, the chart below compares interest rates against lender finance facility pricing from 2020 to 2024 across four major economies.
As the data illustrates, the cost of lender finance facilities has moved in tandem with central bank rate hikes—but at a higher magnitude, particularly in risk-adjusted markets like Mexico and the UK. Spread compression, credit premium volatility, and risk bu ers are now an integral part of facility structuring.
Rising interest rates don’t just impact the cost of capital—they also influence borrower behavior, credit performance, and origination activity. The chart below tracks default rates (in dashed lines) against scaled origination volumes (solid lines) for the same period:
A few key takeaways:
- USA and UK saw noticeable spikes in default rates post-2022, driven by tightening liquidity and consumer stress.
- Mexico experienced the steepest rise in defaults, largely due to FX risks and inflation impact on borrower a ordability.
- Despite rising defaults, origination volumes continued to grow modestly, especially in the USA and UK, reflecting persistent credit demand.
- Canada remained the most stable across both metrics, aligning with its traditionally conservative lending ecosystem.
Cost of Capital vs Return on Equity by Vertical (2024)
For capital allocators and fund managers, rising interest rates raise a critical question: Are lender-backed platforms still producing efficient returns after cost of capital? The chart below compares average cost of capital with Return on Equity (ROE) across six major lending verticals:
Key Insights for Investors:
- Merchant Cash Advance (MCA) platforms continue to lead in profitability, with ROEs significantly exceeding their high cost of capital—often due to dynamic pricing, short durations, and daily payment structures.
- Revenue-Based Lending (RBL) and E-commerce Lending offer strong margins, especially where data-driven underwriting and performance-based repayments reduce losses.
- Real Estate Bridge Lending maintains a healthy spread, driven by asset-backed structures and relatively low default rates.
- Consumer Finance, while widespread, operates on thinner margins due to regulatory scrutiny and competitive APR caps.
- AR Factoring, though stable and predictable, presents the tightest ROE vs. capital cost spread—necessitating scale and operational efficiency to generate meaningful investor returns.
These ROE spreads serve as an important lens for fund managers evaluating which verticals justify facility expansion or deeper capital deployment in a rising-rate environment.
United States: Margin Compression and Structural Innovation
In the U.S., where lender finance is most mature, higher base rates have placed direct pressure on spreads. Warehouse lines tied to SOFR or Prime have passed rising costs onto originators, forcing many to reassess their pricing models and eligibility criteria. This has been particularly challenging for thin-margin verticals like BNPL and subprime consumer loans.
To remain viable, lenders have responded in two ways. First, many have restructured their facilities—negotiating longer terms, diversified collateral pools, or incorporating equity kickers to o set risk. Second, originators are leveraging technology to enhance underwriting precision and reduce defaults, thus protecting NIM (net interest margin).
In high-yield segments like MCA, interest rate hikes have had a mixed impact. On one hand, investor appetite for double-digit yield has increased; on the other, borrower acquisition costs have risen. Flexibility in repayment structures has become a competitive advantage.
Canada: Strategic Conservatism in a Tightening Cycle
Canada’s traditionally cautious credit markets have adapted slowly to the new rate regime. Non-bank lenders have become more selective, focusing on quality over volume. For real estate bridge lenders, the rise in rates has reduced LTV ratios and elongated decision cycles. Still, the asset class remains attractive given short-term tenors and tangible collateral (Bank of Canada).
AR factoring in Canada has proven resilient. As SMEs face longer payment cycles from large customers, demand for receivables financing has grown. However, increased borrowing costs mean lenders must strike a balance between competitive pricing and profitability.
Revenue-based lenders have taken a hit. Higher capital costs mean less room to provide flexible, performance-based payback models unless equity or grant funding supplements the debt stack.
United Kingdom: Precision in Pricing and Risk Allocation
In the UK, higher rates have catalyzed a re-pricing across the fintech lending ecosystem. Ecommerce lenders and RBL platforms, traditionally focused on rapid scale, are shifting gears toward profitability and durable credit performance. Many are renegotiating forward flow arrangements with capital providers to reflect updated risk-reward dynamics.
Structured credit funds remain active but are requiring more frequent re-margining and better data granularity from borrowers. In consumer finance, embedded lenders are tweaking APRs and leveraging behavioral underwriting to stay competitive.
Increased competition for capital has placed a premium on trust, transparency, and governance. The most sophisticated lenders are distinguishing themselves through techenabled servicing and granular reporting—earning more favorable terms even in a rising rate environment.
Mexico: Risk-Adjusted Returns in an Inflationary Landscape
In Mexico, where inflation and currency volatility compound interest rate hikes, the cost of capital for non-bank lenders has surged. Many platforms rely on USD-denominated facilities, amplifying FX risks as local currency revenues lag behind rising debt service costs.
Factoring and MCA remain strong demand areas as small businesses seek fast liquidity, but lenders must now price in macro risks more rigorously. Real estate bridge lending has slowed, with investor caution increasing due to rate instability and valuation uncertainty.
Consumer finance, especially mobile-based lending, is facing headwinds. Originators are prioritizing borrower quality and repayment performance, even if it means slowing down growth. Some are exploring hybrid debt-equity capital stacks or seeking local institutional capital to hedge currency mismatch.
Also Read: Lender financing vs Traditional Loans: Know the Benefits
Avon River Ventures: Structuring Resilience in a Higher-Rate World
At Avon River Ventures, we understand the challenges and opportunities presented by a rising rate environment. Our Lender Finance Program is designed to provide flexible, nondilutive, senior, junior and mezzanine facilities that adapt to changing macro conditions. We work closely with originators to optimize structures—whether that means adjusting advance rates, layering tranches, or structuring profit shares.
By combining deep capital markets expertise with a hands-on partnership approach, we help lenders not only survive—but thrive—in this new cost of capital paradigm. From Canada to Mexico, and from the U.S. to the UK, our focus remains constant: to power platforms that are data-driven, forward-thinking, and built to endure.