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Asset Based Loans Using Real Estate as Collateral

ABLs Using Real Estate

Using both personal real estate and commercial real estate as the basis to obtain a business loan may be an appealing option to small business owners who have equity in their home or commercial land or building, and are looking to use that equity to obtain financing for their company. With the number of commercial buildings consistently increasing, a business owner may look to leverage that real estate with a 2nd or 3rd lien to obtain a line-of-credit. The Commercial Buildings Energy Consumption Surveys latest report on commercial activity shows there are at least 5,600,000 commercial buildings in the United States in 2012 — which is an increase of around 14% over the past decade. With the increase in the number of commercial buildings (many owned by small businesses using the space as owner-user properties) a business owner can use the net worth of the building or land to obtain financing that wouldn’t be provided by conventional lenders.

What is Asset Based Lending?

Asset based lending (ABL) is the practice providing a business financing based upon monetizing the company’s balance sheet. If a company has assets such as accounts receivables, real estate, inventory, equipment and machinery, they can use them as collateral to obtain financing. The most common facility used for asset based financing is a line-of-credit, although asset based term loans are common. Aside from lines of credit and term loans, other forms of asset-based lending includes merchant cash advances, factoring, equipment leasing and invoice financing. When the asset based lender provides funding to the company, they will then place a lien (UCC-1) on the asset.

What is Collateral?

Collateral is an asset that any lender can use to secure a small business loan. When the lender provides funding to the small business, they will then place a UCC-1 lien on the business or personal asset, and if the borrower fails to repay the loan, the lender can then move forward with seizing the collateral to help recoup their losses. By reducing the risk exposure to the lender, it will reflect in the rates provided to the borrower. Secured business lending using collateral tends to have lower rates than unsecured business financing.

What Kind of Real Estate Can Be Used As Collateral?

Virtually any commercial property can be used to secure asset based based financing. While traditional lender may place a lien on commercial real estate when a company applies for a term loan, they rarely look to use personal real estate to secure financing (although they may make a small business owner sign a personal guarantee. If they do sign the personal guarantee, they are potentially pledging all their personal asset, including their own personal real estate). Asset based lenders, on the other hand, will look to secure loans using a business owner’s personal house, property and/or land. Lenders that are willing to make asset based loans using real estate understand that the borrower most likely already has a mortgage on their homes, so they are willing to take 2nd positions subordinate to the mortgage lender, and still provide financing for up to 65 loan-to-value.

What Kind of Financing is Offered When Using Real Estate as Collateral?

There are a number of financing options available for company’s that are willing to unlock the equity in their real estate. From the top banks on down to subprime asset based lenders, there are funding options structured as a term loan, a line of credit, or ACH financing. Most traditional bank business lenders will look to use commercial real estate strictly as collateral for a term loan. Alternative asset based lenders will look to use the collateral along with the business’s cash-flow to provide lines-of-credit. Subprime asset based lenders will usually structure the financing much like a merchant cash advance, in that they may require daily or weekly repayments directly from the company’s bank accounts via ACH. Rates tend to be higher than traditional financing, but since there is real estate being used to secure the loan, asset based loans using real estate tend to have lower rates than high-interest cash advance.

What are the Rates and Terms

Rates and terms of asset based loan vary greatly depending upon the type and quality of collateral being pledged. Accounts receivables generally have a loan-to-value of around 80%, while inventory and equipment tend to have an LTV of around 50%. Asset based loans using real estate can have up to 65% LTV even in 2nd and 3rd positions. Rates also vary greatly. Traditional lenders that offers asset based loans have rates in the single digits, whereas subprime asset based funding companies can have rates that can go as high as 20%. Terms can range anywhere from 1 year on up to 5 years, although 1 to 3 years is most common.

What is the Process of Securing an Asset Based Loan?

The process of getting an asset based loan varies depending upon the lender. If you’re looking for more traditional asset based financing, you will need to provide:

  • Application
  • 3 years tax returns
  • 3 years income statements (including year-to-date)
  • 3 years balance sheets (including year-to-date)
  • A/R and A/P aging schedules
  • Schedule of liabilities
  • Appraisals of collateral

If you are looking for subprime asset based lending using either commercial real estate or personal land, real estate or other property, you will need to provide:

  • Credit application
  • Bank statements
  • Collateral form
  • BPO and Title report

Once all documents are provided to the lenders, you can expect the due diligence and underwriting process to take anywhere from 1-4 weeks.

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