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Private / Specialty Financing: Asset-Based Loans

 

An asset-based loan is a short-term loan secured by a company's assets. Real estate, A/R, inventory, and equipment are typical assets used to back the loan. The loan may be backed by a single category of assets or some combination of assets, for instance, a combination of A/R and equipment.


Typical Borrower

True asset-based or "equity-based" lending is easier to obtain for borrowers who do not conform to typical lending standards:

· Borrower may have no, little or poor credit rating.
·
Borrower may have little income to document in order to support the payments, and may need to rely on the loan itself to pay back the lender until the property is either sold, refinanced, or their income resumes.
· Borrower may also have little or no down payment on a large commercial purchase transaction, as would otherwise be required, because they are buying it under value.
· Borrower may have negotiated a seller carry-back to cover the remaining balance of the purchase price, not covered by the first position mortgage.


Loan Terms

asset-based lenders typically limit the loans to a 50 or 65 loan to value ratio or "LTV". For example: If the appraisal is valued at $1,000,000.00 a lender might lend between $500,000.00 and $650,000.00.

A borrower is more likely to default with little or no down payment, and has little invested making it easier to "walk away" and default under the terms of the promissory note. In the event of a default resulting in a foreclosure, the first lien position lender is entitled to repayment first, out of the proceeds of the sale. Exceptions may occur in the event of a "short sale", where the property is overvalued and actually sells for less, and does not cover the loan. The lender can than issue a deficiency judgement against the borrower for the remaining balance if it can be obtained. An asset-based lender will feel content that at an average of 60% LTV they have enough equity to use to cover any expenses incurred in the event of a default.

These expenses would include:

· Arrearages including all past due interest, late charges and servicing fees.
· Past due delinquent property taxes.
· Foreclosure filing and attorney's fees.
· Miscellaneous credit and collection fees associated with foreclosure proceedings.


Secondary Financing
Allowing secondary financing is common in asset-based lending programs. asset-based lenders may allow subordinate financing, if they are content with the amount of equity remaining beyond their lien position (often first).

Some asset-based lenders will allow a second mortgage from another lender or seller to occur up to the full amount of the properties value, while others may restrict secondary financing to a specific Combined Loan-To-Value or "CLTV". For example while they may lend at a 50% Loan-to-Value Ratio, they may allow a seller carry-back or secondary financing from another party for up to the full value, otherwise stated as 100% Combined Loan To Value Ratio. They may in some cases require that the borrower have at least 5% or more of their own funds (95% CLTV). That would allow for up to 45% of the value to be financed by a secondary lender. The secondary lender is in subordinate position and at a higher risk. A seller might take the chance in order to facilitate the sale of his property quickly and/or at full price.

 
 

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