Finimpact
What is an asset-based lender?

An asset-based lender for real estate is sometimes called a hard money lender. As a borrower, you will provide real estate as collateral for this type of loan.

What are the typical use cases of asset-based lending?

Asset-based lending is regularly used by small to medium-sized businesses that need an influx of cash to handle cover their expenses. Although a business may be rich in assets, tapping into that value can help alleviate cash flow issues. Generally, businesses that pursue this option have significant assets to put up as collateral.

When do commercial real estate investors turn towards asset-based lending?

Commercial real estate investors often turn to asset-based lending in the following scenarios:

     Poor credit: If an investor has assets but poor credit, this type of financing is a good option.

     Flexible financing solutions: Not all loans are created equally. If you have unique funding needs, asset-based lending could work.

     Speed required: Asset-based lending is faster than traditional lending options. With that, investors that need a fast turnaround typically seek out this opportunity.

What makes good collateral in asset-based lending?

Not all collateral is treated equally in the eyes of a lender.

     Equity: Equity is determined by subtracting all outstanding debts secured against a property from its value. So, if a property is worth $100,000 and there is a $60,000 mortgage, the owner would hold $40,000 in equity.

     Positive equity preferred: Most lenders are only willing to offer loans based on collateral in which an owner has positive equity. With that, you’d need to own more than half of the equity in a property.

What types of real estate collateral are problematic for asset-based lending?

If you are pursuing asset-based lending, here are some problems you might run into.

     Little equity: If you don’t hold a sizeable chunk of equity in a property, then you will struggle to obtain this type of loan.

     First lien position preferred: If you already have an existing loan on a property, that could be an issue. Lenders want to be first in line for repayment if the collateral is sold.

How to evaluate the value of my collateral from the asset-based lending perspective?

When evaluating collateral, asset-based lenders want you to have the most possible equity in a property. Essentially, the most equity you have, the better your approval chances are.

Would an asset-based lender be more motivated to take my property than a regular mortgage company?

Asset-based loans for real estate are technically business loans. With that, you won’t find the same foreclosure protections in places as you would for a consumer mortgage. However, that doesn’t mean that lenders aren’t willing to work with you. If you are struggling to keep up with a loan, reach out to your lender to explore possible solutions.

Conclusion

Asset-based lending for real estate is relatively straightforward. You’ll use a piece of real estate to secure a loan. Before you jump into any business loan, explore all of your options to find the best fit.

About the Author

Sarah Sharkey

Sarah Sharkey

Personal Finance Writer

Sarah Sharkey is a personal finance writer who enjoys helping people make better financial decisions.

More about me