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An asset-based loan is a loan, often for a short term, secured by a company's assets. Real estate, accounts receivable (A/R), inventory, and equipment are typical assets used to back the loan. The loan may be backed by a single category of assets or some combination of assets, for instance, a combination of A/R and equipment.
Asset-based lending is a term more frequently used in conjunction with commercial real estate financing as opposed to simply hard money which is used for reside money or bridge financing.
Hard money is for problem credit, and bridge for short term, hence the phrase "bridge". Instead, asset-based lending for commercial property sometimes actually includes more than real estate. It can include accounts receivable, equipment, patents and other business assets. The below comments are accurate when the term is used in conjunction with residential finance, but not reflective of commercial finance. Asset based lending is used with all size companies and can allow an asset-rich corporation to receive financing when they are experiencing a need for growth or have not met standard liquidity or credit requirements. They do not always pay a higher rate of interest.
True asset based or "equity based" lending is easier to obtain for borrowers who do not conform to typical lending standards.
- They may have no, little or terrible credit.
- They may have little income to support the payments, and may need to rely on the loan itself to pay back the lender until the property is either sold, refinanced, or their income resumes.
- They may also have little or no down payment on a large commercial purchase transaction, as would otherwise be required, because they are buying it under value.
- They may have struck a deal with the seller to lend them the remaining balance of the purchase price, not covered by the first position mortgage.
Percentage of appraised value
Asset based lenders typically limit the loans to a 50% or 65% loan to value ratio or "LTV". For example: If the appraisal is valued at $1,000,000.00 a lender might lend between $500,000.00 and $650,000.00.
A borrower is more likely to default with little or no down payment, and has little invested, making it easier to "walk away" from the deal if it does not go well. In the event of a default resulting in a foreclosure, the first lien position lender is entitled to repayment first, out of the proceeds of the sale. Exceptions may occur in the event of a "short sale", where the property is overvalued and actually sells for less, and does not cover the loan. The lender can then sue the borrower for the remaining balance if it can be obtained. An asset-based lender knows that and usually will feel content that at an average 60% LTV they have enough equity to use to cover any expenses incurred in the event of a default.
These expenses would include:
- Past due interest on the loan they have given
- Past due property taxes on the property if the borrower has stopped paying them also
- Lawyer's fees
- Miscelleneous credit and collection fees associated with foreclosure.
Allowing secondary financing is common on asset based lending programs. Asset based lenders may allow this, if they are content with the amount of equity remaining beyond their lien position (often first).
Some asset-based lenders will allow a second mortgage from another lender or seller to occur up to the full amount of the property's value, while others may restrict secondary financing to a specific Combined Loan To Value or "CLTV". For example while they may lend at a 50 Loan to Value Ratio of the property value, they may allow secondary financing from another party for up to the full value, otherwise stated as 100 Combined Loan To Value Ratio. They may in some cases require that the borrower have at least 5% or more of their own funds, which would be expressed as a CLTV of 95. That would allow for up to 45% of the value to be financed by a secondary lender. The secondary lender is at a higher risk. A seller might take the chance in order to facilitate the sale of his property quickly and/or at full price.
- Asset-based lending
- Asset-backed security
- Hard money loan
- Second lien
- Senior stretch loan
- Cash flow loan