Have you ever heard the term “asset based lending” and have not known what it meant? Businesses usually take out loans to meet various cash flow needs of their companies, for example, meeting payroll or building inventory. When a company cannot show that it can pay for a loan through its cash flows, or receivables, the lender may decide to approve the loan based on the value of the entity’s assets. This form of business financing is referred to as asset-based lending. This is obviously very common in real estate lending as lenders like Summit Capital provide funding based on the value of the asset not just the credit, cash on hand, and history of the borrower.
Asset-based lending occurs when a loan is granted to a firm solely on the value of assets pledged as collateral. The terms and conditions of an asset-based loan depends on the type and value of assets offered as security to the lender. Lenders usually prefer highly liquid securities that can readily be converted to cash in situations where the borrower defaults on its payments. In general, the more liquid the pledged asset, the higher the loan-to-value ratio. In addition, loans that are granted under asset-based financing are never the full value of the assets pledged.
Interest rates on these loans, are less than interest rates on an unsecured loan or line of credit because if the borrower defaults, the lender has the ability to seize assets and sell them in an attempt to recoup its lending costs. The lender’s interest is secured by the assets of the borrower which also determines how large of a loan a company can access. The interest charged on an asset-based loan is determined by the size of the loan, and ranges from 12% to 17%, depending on the lender, and are expressed as an annual percentage rate (APR).
We hope this helps pull the curtain back on asset based lending as it pertains to real estate. If you would like to discuss in greater detail don’t hesitate to reach out to us here are Summit Capital. We offer asset-based lending for real estate in Massachusetts, so give us a try on your next deal, you will not regret it! We are a local family owned, direct lender proudly serving all of MA and RI, from Boston to Providence and every town in between.