What is Asset-Based Lending and Why Should Brokers Work with These Lenders?
Fix & Flip
11 Jan 2022
5 min read
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Whether you’re new to real estate investing or not, it might be great to hear that there are several different types of financing options available to you, each with various investing purposes. One such option is asset-based lending (or ABL) where your loan is secured by your business asset—in this case, the investment property. Rather than obtaining a loan strictly based on financial numbers, ABLs allows you to use the investment property as collateral, unlocking needed capital you may not have otherwise had access to. Moreover, it can provide you with the opportunity to obtain money in a way that doesn’t involve taking out a traditional mortgage.
As with all real estate investment decisions you make, it’s important to fundamentally understand the ins and outs of how this lending strategy can affect your bottom line—and determine early on if it’s even a suitable option.
How do ABLs work?
As already mentioned, if you opt for the ABL route for your next investment project, that means the loan will be secured by the property you need the money for. The terms of ABLs can vary (they depend on the value of the property, for example) but typically, private lenders will provide funds on an agreed-upon percentage of the property’s value, often ranging between 70 and 80%.
Loans used for physical assets (such as real estate) are commonly considered “riskier” by lenders, and as such, they require investors contribute a decent down payment. Don’t be surprised at the expectation to contribute up to 20% of the property’s value to secure the rest of the loan amount in return.
Who can benefit from ABLs?
ABLs are common for fix-and-flip projects and should be relatively easy to secure if you have detailed financial business records. Why?
A fix-and-flip project usually means the property itself is in rundown shape and not worth the market value. Strong financial records can prove that you have credible, long-term viability and that you can’t be derailed by this particular project.
Additionally, if you don’t qualify for traditional financing options, you might be the right candidate for securing an ABL. That’s because outside of traditional bank loans, private lenders often look to the asset rather than the borrower for the underwriting process.
Advantages of ABLs
Successful real estate investment can’t be achieved without efficiency and speed, and that’s perhaps the greatest benefit of securing an ABL. This lending method is directly correlated to faster loan processes, and that’s no surprise when considering that private lenders are not held to the same restrictions as banks. In short, they require less documentation, resulting in a faster closing process. Faster loan grants mean faster closing which means a faster start to the project. For a competitive industry, this can be the difference between you snagging a property and watching it go to someone else.
Moreover, for investors who may not have a lot of seed funds to kick off a project, ABLs can be an ideal way to secure the necessary funds using outside money. This is important if you live (or invest) in an area with an expensive housing market; it can help you break onto the scene.
Together with efficiency, flexibility is just as important for investors to experience throughout the lending process, and private lenders often don’t have set rules in place as banks do. As a result, there tends to be more flexibility with repayment terms, interest rates, and be generally more open to negotiations.
Finding the right private lender for your next project can be a challenge but it’s the first step to ensuring your investment project starts off on the right foot. If you’ve already determined that a traditional loan is not going to work for you, consider contacting Temple View Capital Funding, LP (“Temple View”) to explore other private lending options, including ABLs.