Tag Archives | asset based lending

Working Capital From Real Estate

See Also:
Balance Sheet
Current Assets
Working Capital
Working Capital Analysis
Current Liabilities
How to collect accounts receivable
Factoring

Working Capital From Real Estate Example: An Asset Based Lending Solution to Cash Shortfalls and Opportunities

Let’s look at a working capital from real estate example. Moreover, look at an asset based lending solution to cash shortfalls and opportunities

Problem in the Working Capital From Real Estate Example

Many companies own the land and buildings necessary to conduct the day-to-day operations of their business. Oftentimes, this valuable asset is included in traditional bank financing packages as the cornerstone of the credit facility. As long as the business progresses as the bank deems appropriate, and all loan and debt service coverage covenants remain in compliance, the real estate loan will serve to anchor the lending relationship.

Companies and/or individuals may also own commercial real estate which may provide an income stream or conversely, suffer from under-utilization and needed development. The banking community typically finances these transactions as a “onetime” advance. That advance is conditioned for certain renewal requirements. In addition, additional funding is triggered by developmental thresholds that have to be met. Additionally, the investment opportunity associated with these properties may require balance sheet leverage beyond what the bank is willing to tolerate.

More often than not, an adverse business or personal event occurs which places the commercial property owner in a position where cash is critical but not readily available. Such situations could involve the following:

  • Delinquent taxes
  • Tax liens
  • Legal expenses
  • Divorce settlements
  • Environmental issues
  • Any number of cash draining, unpleasant scenarios

In the first two examples cited above, the traditional bank lending relationship may deteriorate because of economic or bank regulation issues beyond the control of the borrower. The real estate may have appreciated in value since the bank extended the original bank loan. However, further leverage of that equity is not available from the bank because of payment default, covenant compliance or regulation issues with which the bank has to contend. In the third example, the bank is oftentimes prohibited by internal policy and regulators from extending credit for the purpose of satisfying such obligations.

Solution in the Working Capital From Real Estate Example

There are companies within the asset based lending community that can provide necessary funding to alleviate the cash shortfalls caused by the aforementioned problems. The asset based lender is more willing to look to the current appraised value of the real estate collateral to insure repayment as opposed to cash flow and financial statement strength. While loan to value percentages may be somewhat less than those allowed by the banking community, the liberal repayment terms and lack of covenant and compliance requirements afford the borrower the opportunity to alleviate the cash shortage and retain possession and control of the assets important to the well-being of the business and his livelihood. Some examples of the flexibility offered by an asset based real estate loan include the following:

  • Bridge loans
  • Interest only
  • Twenty-five year amortizations
  • Escrowed payment reserves

When cash is critical, and the options become limited, the appraisal value equity in commercial real estate can provide an asset based loan to alleviate the problem.

If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

Working Capital From Real Estate Example
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Working Capital From Real Estate Example

See related articles: Mining the Balance Sheet for Working Capital

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Asset Based Financing

See Also:
Mezzanine Debt Financing (Mezzanine Loans)
Subordinated Debt
Collateralized Debt Obligations
Passthrough Securities
Ledger Account
Negative Equity

Asset Based Financing Definition

Asset based financing is based upon collateralizing a loan with a certain asset or the cash flows from an asset like a receivable. Additionally, asset financing is used quite often to try and receive cash in the form of a loan. The investors in asset backed financing often have first claim over the assets.

Asset Based Financing Explained

Often times, companies have accounts receivable payments that they believe they will see in the future. If they believe that they will need financing soon they will use these future receivables and sell them off to investors. This allows the company to become more liquid by receiving a loan of cash up front rather than having to wait on the future receivables so that the company is able to meet its short term obligations. If the company were to default on this loan then the asset based lender could assume the future receivable payments to pay the loan. Another form of asset based lending is for a company to simply use an asset like equipment or land as collateral in order to obtain a loan. This occurs if a bank or other financial institution decides not to extend credit unless they have some sort of collateral.

Asset Based Financing Example

Tiny Tots Inc. specializes in the manufacture of toys. Currently, the company wants to obtain financing so that it can expand its operations into South America. After visiting with the bank, the bank decides that it will provide financing. But the company must use asset backed financing and put its current production facility up as collateral. Tiny Tots agrees with this proposition and a contract is signed. After 5 years of production Tiny Tots has become very successful in South America. Tiny Tots pays off the loan, thereby freeing the production facility from the asset backed security. It should be noted that if the company had failed to make the interest and principal payments that the bank has the ability to take possession of the production facility. Then the bank will sell it to pay off the loan.

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

asset based financing
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Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

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asset based financing

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Asset-Based Lending

If your company is in need of financing but it has been a challenge obtaining it from a traditional lender such as a bank, then you might consider alternative lending sources, such as asset-based lenders. Asset-based lending or ABLs will lend against collateral. Comparatively, other types of lenders lend based on your creditworthiness. As a result, this is what tends to make it difficult for start-ups and those with recent losses and cash flow difficulties from obtaining a bank loan.

Asset-Based Lending

I came across an interesting article in the Journal last week which detailed the benefits of asset-based lending, especially if it is difficult for you to quality for a bank loan.

Here’s a great article comparing traditional commercial bank financing to asset-based financing.

If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

Asset-Based Lending
Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Asset-Based Lending

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