What Does Asset-Based Lending Mean? Business owners, what happens if you find yourself in a position where you do not qualify for traditional bank financing or lending programs when you search for a business loan due to your credit score? What happens when you need additional capital or a cash advance to take advantage of a tremendous business opportunity in real estate right now? Maybe you need to consider taking a “non-traditional” route or seeking an alternative lender or online lender that offers small business funding based on your assets or collateral. Asset Based Hard Money Lending This type of lending refers to the use of an asset to secure financing. Collateral or assets like real estate secure the financing. This type of lending refers to the use of an asset to secure financing. Collateral or assets like real estate secure the financing. Asset-based loans are one form of commercial finance. The borrower uses or pledges a real asset or real property, such as commercial real estate, as collateral to secure the financing. These loan options are designed to help those who can’t go to a traditional lender. The reasons can range from poor business credit to your personal credit score not meeting the minimum requirements. Seeking an asset-based loan circumvents going the traditional bank loan route. You are looking for a secured loan without taking out a personal loan. Many types of assets qualify to secure the funding for real estate. These can include: Cash, Stocks and bonds, Real estate, Certain types of equipment, Inventory and, Accounts receivable What is Hard Asset Based Lending? Hard asset-based lending is an alternative type of commercial financing. A company will typically use its account receivables (invoice factoring), inventory, equipment, or even its machinery as the collateral to secure the funding. Can I Use Property as Collateral for a Loan? es, you can use commercial real estate, farms, land, and private homes as collateral. Most of the traditional loan programs prefer more liquid type assets as collateral that can be liquidated quickly in the event of a default. Remember, it is the collateral that provides the security on the business cash advance to the company, not profitability. The loan application process has less to do with your business credit score and more to do with the quality being used as collateral. Asset based hard money lenders consider this financing riskier than traditional commercial banking, and as a result, will have higher interest rates. Most lenders and borrowers consider this a high risk business loan (even though there is collateral, making it a secured business loan). Can You Use Real Estate as Collateral? WHAT KIND OF PROPERTIES DO WE FINANCE? Medical offices and facilities Office buildings and office condos Warehouses and other industrial properties Daycare facilities Free-standing restaurants (mostly franchised) Auto repair shops Assisted-living facilities And MANY more… Commercial real estate investing utilizes the asset based loan when traditional commercial loans are not an option. The key to the commercial hard money loan is the underlying value of the property and the property type. GOOD, THE BAD AND THE UGLY The GOOD is that the funding process it’s a lot easier than securing money from a bank or credit union. The BAD is that a down payment is sometimes required. The UGLY is that it is more expensive (But if you need it – it is there). FROM THE DESK OF MARK KANE All business financing is about the ROI or Return on Investment. What is the money going to do for you? If you invest $1 or $1m into your business, what will it return? R-O-I If you don’t take the business financing, what will happen? Is There A Difference Between Asset Based and Hard Money Loans? The reality is that by the nature of the loan, hard money usually is an asset-based loan. Unlike the unsecured business loan, the asset based loan is backed or secured by collateral or assets. The term hard money signifies the increased corresponding risk associated with this type of financing. Therefore they are classified as high risk business loans. Why is Asset Based Lending an Alternative? Asset-based lenders provide programs for those that don’t qualify for traditional bank financing. It can be for business owners that need a fast business cash advance or money for a deal or opportunity NOW. This small business loan is not a merchant cash advance. Maybe you need bridge loans. The asset-based funding for real estate is for those that want less expensive business funding than pure hard money funds. For some business owners, leveraging their real estate assets helps improve their cash flow. Other reasons for the asset-based loans are for an equipment loan or capital expenditures. These business funding options can provide a way to reduce debt, pay off tax liens, or other credit issues or as a short term loan. THERE ARE TWO QUICK QUESTIONS TO SEE IF YOU PRE-QUALIFY. Do you own a lot of equipment or real estate? Do you need access to business capital to keep your business running? If you answered “Yes,” you may be asking yourself, “Who qualifies?” How Does Asset Lending Work? Who qualifies? Small to medium-sized businesses (SMBs) that are unable to obtain traditional financing due to bad credit or insufficient solvency use the asset-based funding option. Other times it is when there is no other access to capital, even though they are well qualified, that the business turns to this type of financing. If you find yourself in that situation and have unencumbered equipment and or significant equity in real estate (residential, commercial, retail, industrial), the hard asset-based may be a perfect fit. Do you have guarantors? Do you or your guarantors have strong personal financial statements? Are you a new business with sufficient cash for required down payments? Do you have adequate collateral coverage? Do you have the cash flow or annual revenue to cover the note? Can you say “yes” to one or more of these questions? If so, it can mean you are eligible to secure the financing you need. Here is what you need to go through the underwriting process: One-page application Bank Statements 3 years business tax returns Income statements (including year-to-date) Balance sheets (including year-to-date) A/R (account receivables) and A/P aging schedules (account payables) Schedule of liabilities/debt Appraisals of collateral What Are the Rates and Terms? Rates and terms reflect many variables. A significant consideration is the quality of the collateral or asset. Each asset will have a loan-to-value or LTV. Below are a few conservative estimates using an ABL. Real estate can have an LTV of 65% (even in a second or third position). Equipment may have only a 50% LTV. Account receivables can have an LTV of 80%. RATES: Rates always reflect risk. A 15-year mortgage is always less expensive rate-wise than a 30-yr. mortgage. A 3-year car lease is less risky than 7-yrs. There is an inverse relationship with the term and rate. The longer the term, the lower the payment, and the higher the rate. A traditional bank financing option maybe for five years, at single-digit rates, on a commercial loan. An SBA loan is also single digits and can extend for ten years. An SBA real estate mortgage loan can extend to 25 years with single-digit rates. An ABL can be short term, months to a few years (3 to 5 yrs.). Most tend to be 1 to 5-years. The rates typically start at 11% and can be 29%. It is also not unusual to pay origination fees or points. There can be an additional 4 – 8% When Do You Need Asset-Based Loans? Anytime you need to purchase equipment to expand or even to start a business. Or you need capital to pursue a highly profitable business opportunity, expansion, or acquisition finance. Are you looking to financing options to refinance existing high-cost debts or pay-off tax liens or other credit-damaging liabilities? Are you drowning in high-cost debts and or short-term merchant cash advance loans? Sometimes it’s for short-term working capital requirements or a combination of any of the above. The funds are usually dispersed as a line of credit, although it can be a term loan. Why Do Small Business Owners Use Hard Money Loans? If these loan products are significantly more expensive than a traditional bank term loans, then why do business owners look for this type of loan or a hard money lender? The reason is simple. Hard money of asset based funding options are more accessible to secure than a bank loan or traditional financing options, especially if you have bad credit or bad business credit and cannot qualify otherwise. It is not uncommon for banks or credit unions to require stringent lending criteria. This criterion includes underwriting processes and requirements, including a high personal credit scores and credit approval, three years individual and business tax returns, detailed financial statements like P&L, and balance sheet, to name but a few. A Harvard Business Review suggests that you must visit almost three banks and devote some twenty-eight hours to paperwork preparation to apply for a bank loan. This process lone is enough to turn off the average, busy small business owner. The advantage to an ABL is that a well-established company can get financing much quicker than waiting for the banks that can take 30 – 90 days. Another downside to bank lenders is that the credit ratings of the company and the owner must be outstanding with a positive EBITDA (earnings before interest, taxes, depreciation, and amortization) vs. getting the assets or collateral appraised. The downside to the ABL is the property is the “guarantor.” What that means to you, the business owners is that you will lose the property if you cannot pay off the loan. Creditworthiness is not as critical when you are looking for an asset-based loan-only the value of the collateral. Asset-based lending secures the funds with an asset. Always remember, if you don’t repay the amount borrowed, you sacrifice the asset or collateral for the unpaid portion to the lender. What are the Benefits of a Hard Money Loan? Hard money lenders generally provide faster decisions than a bank business loan. You can borrow more. You’re building a long-term relationship with hard money lenders. Perfect for the new or startup business. Credit history usually is not a factor. Ideal for business owners who rather find new opportunities than try to raise capital. Sunwise Capital is a top finance company and a top asset-based lender. Our loans are typically highly competitive, and we stand behind our offers with a $500 guarantee. Loan amounts are from $50,000 to $5M. What are the Cons of Hard Money Property Loans? High-interest rates High origination fees Not long term Losing the property What are Private Money Loans? Private lenders provide financing options using their own cash. These private money lenders have more flexibility than traditional lenders and provide the same hard money loan programs as many of the asset based lenders. Very often, private hard money provides quicker approvals and funding due to increased competition. They can be more flexible and creative at the same time. Here is a recent example of a recently funded property. A U.S. hemp farmer needed additional funds to grow their business. Initially, they were looking for inventory financing using their recently harvested biomass as collateral. They also considered invoice factoring. The company received multiple rejections for various reasons with hedge funds and cannabis investors—most related to the structure of the deal, and other similar cannabis challenges in general. Rather than wait, the company decided to use its 100% equity in an empty warehouse. Sunwise Capital was able to arrange a private money real estate investor who was willing to provide a loan. The appraisal came in at $300K even though the company purchased the property only a year ago for $700K plus. We found out that the owner demolished and gutted the interior to a shell, therefore, depleting the value. Here are the details: Term: 2-Year Loan Amount: $300K Amortized Payment Fixed Interest Rate: 12.99% Lender Fee (% of Loan Amount): 5% What Is Cash Flow Based Lending? There is a difference between cash flow lending and hard asset-based loans. The primary distinction is that cash flow lending allows the business to borrow money based on its current and future cash flow projections. The company is borrowing money from future revenues. OTHER SUNWISE CAPITAL PROGRAMS INCLUDE: Short term loans Accounts receivable Credit card loans Credit lines SBA loans Commercial real estate loans Unsecured loans Equipment financing We look forward to becoming your preferred real estate financing partner! Use our contact form to let us know how we can help.