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What are advantages and disadvantages of asset-based lending?

On Behalf of | Mar 23, 2016 | Commercial Real Estate |

Developers that are trying to take advantage of the fertile real estate market in Miami might be confronted with the lack of financing to do so. This is where asset-based lending can be beneficial. Asset-based lending is a loan that will allow borrowers to accrue the cash they need to complete certain projects. It is for those whose business is heavily leveraged, has earnings that are not consistent or cash flow that hovers around the margins. Assets are pledged as collateral and there will be a flexible amount of working capital with the monetization of assets.

There are advantages and disadvantages to asset-based lending. The advantages are that it will provide cash to help with liquidity and eliminate the need for the business to wait for payment. It helps a business have funding if they are in an industry that is seasonal or goes up and down in cycles. Asset-based lending will help a company that is growing quickly to have cash to bolster the growth or protect internal capital that was utilized to fund the growth by providing finance for an increase in inventory and receivables. Generally, these loans have limited financial agreements with the structure protecting both the bank and the borrower. Finally, availability can be monitored daily.

There are disadvantages for both parties. The borrower must understand that an asset-based loan will be more costly, with higher rates and fees. In addition, the borrower might be faced with the lender having the ability to take control of cash or take back collateral if there is a decline in the borrowing base to an unsupportable level. The lender has to spend a great deal of time monitoring this type of loan. It is also a method that borrowers frequently use in fraud cases.

With commercial real estate transactions, developers are trying to use the real estate market and its historic strength to build and maintain a business. Sometimes, asset-based lending is an important part of that. However, with commercial real estate, there are many legal hurdles that must be dealt with before and after the project is underway. That can include understanding the ins and outs of the loan and possible legal disagreements after the fact.

Source: occ.treas.gov, “Asset-Based Lending — page 2,” accessed on March 22, 2016