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Asset-Based Commercial Real Estate Loans

Written by Allison Martin

Allison Martin is a personal finance enthusiast and a passionate entrepreneur. With over a decade of experience, Allison has made a name for herself as a syndicated financial writer. Her articles are published in leading publications, like, Bankrate, The Wall Street Journal, MSN Money, and Investopedia. When she’s not busy creating content, Allison travels nationwide, sharing her knowledge and expertise in financial literacy and entrepreneurship through interactive workshops and programs. She also works as a Certified Financial Education Instructor (CFEI) dedicated to helping people from all walks of life achieve financial freedom and success.

Updated November 2, 2023​

5 min. read​

In the world of commercial real estate financing, asset-based loans have emerged as a viable option for businesses seeking to acquire or refinance properties. These loans focus on the value of your assets, such as real estate, equipment, or inventory, which are used as collateral to secure funding. By leveraging your assets, you can potentially access financing with lower interest rates and more flexible repayment terms compared to traditional loans.

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What are Asset-Based Commercial Real Estate Loans?

Asset-based commercial real estate loans are a form of business lending that relies on your company’s collateral, such as property or real estate, rather than just cash flow and credit. The loan amount is typically determined by the value of your collateral and your loan-to-value (LTV) ratio. If your collateral’s value is high, you may be able to secure a larger loan.

Understanding Asset-Based Lending vs. Traditional Lending

Asset-based lending (ABL) is a financing method that uses your company’s assets as collateral to secure the loan. By contrast, traditional lending typically focuses on your creditworthiness, income, and overall financial stability.

How Do Asset-Based Commercial Real Estate Loans Work?

When you apply for an asset-based commercial real estate loan, the lender will assess the value of the collateral you offer. They will typically use the loan-to-value (LTV) ratio to determine the amount they are willing to lend. It is calculated by dividing the loan amount by the collateral’s appraised value. For example, if your commercial property is valued at $1 million and you need a loan of $600,000, the LTV ratio would be 60%.

To obtain an asset-based loan, you will first contact a lender specializing in this type of financing. They will require you to provide documentation about your business, its financial health and details about the collateral you are offering. Once the lender has all the necessary information, they will evaluate the collateral and determine whether it meets their lending criteria.

During the loan term, you will be required to make regular payments – which include principal and interest – to the lender. Maintaining these payments is essential, as failure to do so may result in the lender taking possession of the collateral. Furthermore, you may be required to provide financial statements and regular updates on the value of your collateral to ensure compliance with the loan agreement.

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The Benefits of Asset-Based Commercial Real Estate Loans

Here are some key advantages of this form of lending.

Quick Access to Capital

Asset-based lending (ABL) is an ideal way for businesses to access capital quickly. Unlike traditional loans, which can take months to process, some asset-based loans can be secured within days. This means that your business can get the financing it needs to keep operations running smoothly and efficiently.

Lower Qualification Requirements

Your business’s main asset, such as inventory, accounts receivable, or real estate, is used as collateral, which often means that lenders are willing to provide financing even if your credit score isn’t perfect. This lower barrier to entry can be very beneficial for companies with poor credit or limited financial history.

Flexibility with the Use of Funds

Traditional loans may have strict limitations on how the money can be spent, but asset-based financing generally gives you more freedom to decide how to use the funds. Whether it’s for purchasing new equipment, refinancing existing debt, or expanding your operations, asset-based lending allows you to allocate funds according to your business’s needs.

Potential for Higher Loan Amounts

Since asset-based loans are secured by collateral, lenders may be willing to offer higher loan amounts. This is often because they can recoup their losses by selling the collateral if the borrower defaults on the loan. It’s also beneficial for growing companies or those with sizable investments tied up in valuable assets.

Drawbacks of Asset-Based Commercial Real Estate Loans

Unfortunately, these loans also come with drawbacks worth considering before applying.

High-Interest Rates

Asset-based commercial real estate loans can have higher interest rates compared to traditional loans. High-interest rates can increase the overall cost of the loan, making it more burdensome and reducing the profitability of your real estate investment.

Risk of Losing Asset

Using your property as collateral for an asset-based loan poses the risk of losing your asset if you are unable to repay the loan. This can be especially problematic if real estate is a critical part of your business operations, such as a factory or office building.

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Detailed Reporting Requirements

Asset-based commercial real estate loans often come with strict reporting requirements. Lenders may request detailed financial reports and frequent asset appraisals to ensure that the value of the collateral remains sufficient to secure the loan.

What are the Requirements for Asset-Based Commercial Real Estate Loans?

Below are the general requirements to secure asset-based commercial real estate loans:

  • Collateral: Asset-based loans generally limit financing up to 65% loan-to-value (LTV). This percentage is based on the appraised value of your property.
  • Documentation: Asset-based lenders will require proof of ownership, up-to-date property assessments and financial records, such as balance sheets and income statements. These documents help lenders determine the value of your collateral and assess your loan eligibility.
  • Credit score: While your credit score isn’t the primary factor in asset-based lending, it still plays a role in the loan process. If you have bad credit, you are more likely to receive higher interest rates and stricter terms. However, borrowers with strong credit may qualify for lower rates and more favorable terms.
  • Financial guarantees: In addition to the collateral and credit requirements, you may need to provide additional financial guarantees. Some lenders might require personal guarantees or additional collateral, such as inventory or accounts receivable, to cover the risks associated with the loan.

Be mindful that each lender has its own eligibility guidelines. So, it’s important to inquire before moving forward to find the best fit.

What to Consider Before Applying for an Asset-Based Commercial Real Estate Loan

When looking into asset-based commercial real estate loans, there are several factors you should consider to ensure you make an informed decision. These loans typically involve using your business assets, such as inventory, accounts receivable, equipment, or real estate, as collateral. Knowing key aspects can help you determine whether this type of financing suits your particular situation.

Start by evaluating your credit score. While having a lower credit score can make obtaining traditional loans more challenging, asset-based lending can be an attractive option for investors with less-than-perfect credit. Lenders may be more willing to provide loans with collateral, which lowers their risk. But be prepared for potentially higher interest rates and unfavorable terms.

Next, consider your business’s current assets. You want to make sure you have enough collateral to secure the loan, as lenders may require a certain percentage of the loan amount to be covered. Assess your commercial property or other assets thoroughly to determine their value. Remember that if you default on the loan, you risk losing the collateral.

It’s also crucial to evaluate the flexibility of the loan terms. Asset-based loans can have more negotiable terms than traditional loans, which can benefit your business in terms of payment structure or prepayment options. Be sure to understand all the terms and conditions before accepting an offer, and don’t hesitate to negotiate better loan terms with the lender.

Repayment capacity is another important factor to consider. Analyze your business’s cash flow and financial projections to ensure you can meet repayment obligations. Defaulting puts your commercial real estate or other assets at risk. It can also harm your credit score and future borrowing ability.

Most importantly, research the lender thoroughly. A reputable lender with experience in asset-based lending for commercial properties can help guide you through the process and provide valuable insight. Read reviews, ask for recommendations and compare quotes from different lenders before committing.

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How to Apply for an Asset-Based Commercial Real Estate Loan

When considering an asset-based commercial real estate loan, it’s essential to understand the application process. It entails determining your eligibility, researching and choosing a lender, gathering the necessary documentation, and formally applying for financing.

By following these steps, you’ll be well-equipped to apply for an asset-based commercial real estate loan. Remember, the key to a successful application is thorough preparation and clear communication with your chosen lender.

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