Asset Based Lending For Real Estate
The world of real estate finance has many terms and funding methods used to acquire, rehabilitate, and re-finance projects. Whether you are a buy-and-hold investor or a fix-and-flip borrower, the terms and conditions for asset-based loans are different from traditional loans.
This article will explore those differences and what they mean for real estate investors and real estate investments. Asset-based loans are used for working capital primarily and not for long-term financing like a mortgage. However, there are exceptions to the rule and it’s important to know what exceptions and options are available in today’s highly competitive marketplace.
Why Use an Asset-based Loan and Not a Traditional Loan?
Asset-based lenders aren’t like traditional sources for real estate loans. Traditional lenders follow tried and true formulas for providing loans. In most cases, a traditional loan through a bank or mortgage company requires at least a 20% down payment before the loan will be offered. Traditional lenders also prefer borrowers with credit scores above 740 and a few other requirements which often puts a traditional loan out of reach for some borrowers.
Asset-based lending for real estate is more focused on the value of the property and the property’s ability to generate income as well as the property’s sale-ability on the open market. When the deal needs to be funded quickly without all the usual red tape, asset-based loans can be a viable alternative to refinancing traditional mortgages.
Advantages of an Asset-based Loan
Because asset-based loans are more concerned with a commercial real estate property’s ability to generate income, there are fewer requirements for the use of personal information and other details in the process of acquiring the loan. Asset-based lenders provide financing at higher rates than traditional loan resources because their funds aren’t going to be tied up for long, usually 18 months or less. This short term relationship comes with greater risk for the lender due to the rapid repayment terms of the loan.
An asset-based loan is considered a good solution to emergencies where quick repairs or remodeling of real estate are necessary. This type of loan also works well as a means to fund a project between two loans like a property development loan and a long-term mortgage.
Bridge and Mezzanine Financing
Sometimes, a borrower needs money to make it from one loan to another loan with capital available during the process. It’s called a “bridge” or “bridge loan” and it happens all the time. Mezzanine financing is similar to a Bridge loan except the lender is given an equity position in the real estate in the event of default on repayment of the loan.
Bridge loans and mezzanine financing should be considered in cases where the borrower has confidence in their ability to repay the loan without complications or delays. Bridge loans and mezzanine financing can be important tools for completing a real estate project with the least amount of work interruption.
House Flipping Loans – Multifamily Commercial Properties
Are Asset-based Loans For Short Term Only?
Some lenders will offer longer repayment terms for an asset-based loan. The lenders are charging a higher interest rate than most funding sources and as long as the loan has sufficient collateral behind it, the asset-based lenders are willing to carry the loan for a longer period. Some lenders offer 30-year asset-based loans on rental properties.
Short term asset based loans can be had with up to 90% financing. For some borrowers, these are more attractive terms than those offered by traditional lenders. Some asset-based lenders can provide 100% funding for real estate rehabilitation projects making property remodels and upgrades easier on cash flow.
Are Asset-based Loans Considered Hard Money Loans?
Hard money loans usually have different repayment terms than an asset-based loan. Most hard money loans require interest-only payments until the final amount is due in a lump sum. There are some negatives attached to hard money loans, but the fact is when a borrower needs funding quickly, there are fewer restrictions for providing personal information to obtain the loan. Less paperwork means faster turnaround time for the funds and sometimes, that’s a critical factor. The idea is for the borrower to secure more favorable and longer-term financing to replace the hard money loan. Borrowers need to be aware of all the terms and conditions associated with a hard money loan including early payment penalties and default triggers.
Best Resources for Asset-based Lending
There are hundreds of companies offering asset-based lending. Local banks, the Small Business Administration, and a variety of incubator funding groups can offer asset-based loans. The difference is the amount of experience the lender has working with asset-based lending and the terms associated with receiving the funds.
In the case of the Small Business Administration, borrowers are required to pledge all their personal assets in addition to the asset being financed. This can make life complicated if the borrower decides to sell their home or other pledged asset. For many banks, the down payment, credit score requirement, and other conditions can make the approval process long and labor-intensive. For most borrowers, the best resource for obtaining an asset-based loan is from an experienced resource familiar with every aspect of the transaction.
Checklist for Determining the Best Asset-Based Lenders
What should a borrower look for when they are considering an asset-based lender? There are several areas borrowers should consider before selecting a lender:
1) The company should offer other types of financing. Specialization is okay, but for a real estate investor or owner to grow and succeed, they need a lender who can help with more than just one type of funding.
2) They should offer both short term and longer-term asset-based loans for real estate. Short term financing is important, but short term funding can become long term financing under the right conditions. Borrowers don’t want to go looking for another lender, they need a lender that can transit from short to long term seamlessly and easily.
3) The company should have experience with different types of loans. There is great value in understanding the entire funding landscape and what has occurred over time. It takes time in service to truly understand the scope and nature of asset-based lending.
4) They should have been in business for a while. Doing business with a “Johnny-come-lately” funding source isn’t always the best idea. Borrowing money is a serious business decision and receiving financing from an inexperienced lender can create additional risks for borrowers. It’s better to work with an experienced lender who has passed the test of time.
5) The company should offer third-party guaranteed loans like SBA 7(a) and SBA 504 loans. Asset-based borrowing can be accomplished using third-party support to bolster a borrower’s ability to secure funds.
6) Down payment terms should be flexible. Every client is different and every real estate deal is different. It works better when the lender and borrower can work together to discover the best way to close the deal. Nobody likes being given a “standard” contract when they have unique circumstances to deal with.
7) The underwriters should be up to date on all legislation, codes, and guidelines. Laws change all the time and so do local ordinances and regulations relating to funding projects. Government resources are morphing into semi-private businesses. SBA guidelines, state laws, and local ordinances can quickly change requiring revisions to funding contracts. It’s best to have the necessary training and updating to stay ahead of the changes and prevent obstacles created by submitting incorrect documents.
Asset-based Lending Solution
One of the best resources for finding an asset-based loan is the Internet. The problem is wading through all the companies, banks, and private lenders to find exactly the right one. A borrower could spend days searching through the maze of lenders, offers, and agreements. When it’s time to find the right lender with the right terms and conditions as well as the right credentials, the choices can narrow down quickly.
One of the most valuable and trusted resources are the lenders at Neal Business Funding. Real estate professionals know how valuable Neal Business Funding is when it comes to not only financing asset-based real estate deals, but also when it comes to supporting their clients with a wide array of products and services.
Neal Business Funding Has All the Answers
Many commercial real estate owners and investors have turned to Neal Business Funding for all their financing needs. The variety of financing options combined with their longevity in the field makes Neal Business Funding one of the truly unique commercial lending groups in America today. No matter what type of funding is needed, hundreds of professionals have turned to Neal Business Funding with confidence and trust. Customers can go online to www.nealfunding.com and discover the amazing variety of funding alternatives they have to offer. The website offers important information regarding options for financing, including asset-based loans for commercial real estate projects. Interested customers can submit an inquiry on the company’s website contact page or they can call 315-699-4703 and speak with a loan support expert. Customers can also send an email to info@nealfunding.com to get additional information or have any questions they may have answered quickly and professionally.
