An Asset Based Lending Solution to Cash Shortfalls and Opportunities
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. These transactions are typically financed by the banking community as a “onetime” advance which is conditioned for certain renewal requirements, and/or 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 delinquent taxes, tax liens, legal expenses, divorce settlements, environmental issues or 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 original bank loan was extended. 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.
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. Bridge loans, interest only, twenty-five year amortizations, and escrowed payment reserves are some examples of the flexibility offered by an asset based real estate loan.
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.
See related articles: Mining the Balance Sheet for Working Capital