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Demystifying Asset-Based Lending

August 27, 2020

[2 Min Read]

Asset-based lending is defined as loaning money in an agreement that is secured by collateral. Asset-based loans or lines of credit can be secured by real estate, inventory, accounts receivable, equipment, art, or other assets owned by the borrower. The asset-based lending industry primarily serves businesses, not consumers. At Vaster Capital, we only lend against real estate collateral.

On bridge loans made to real estate investors, asset-based lending practices place more weight on underwriting the collateral’s value than on the creditworthiness of the borrowing entity and its guarantors. That doesn’t mean that there isn’t a cursory review of the borrowing entity’s financial and legal standing and guarantors overall financial strength. It just means that there is more emphasis on the collateral when making a credit decision.

In real estate investing, the collateral value is one of the key components in assessing the risk of a transaction. Most asset-based real estate lenders that are either bridge, private money, or hard money lenders, manage their appetite for risk differently by working with a triangle of factors which include; value, price (interest rate), and leverage (LTV). For some bridge lenders, their leverage could be higher and their interest rate lower because they will factor more than just the collateral’s value in their risk analysis. For example, they will look at the guarantor’s background, creditworthiness, and financial strength to ascertain more information in determining risk. For others that focus entirely on the collateral, will most likely maintain lower leverage (the percentage financed) and a higher price (interest rate) to compensate for unknown risks.

When assessing the guarantor’s creditworthiness, traditional lenders use underwriting guidelines based on credit score tiers. Asset base lenders on the other hand, do not usually have specific credit score guidelines but focus more on critical specific credit events as a proxy for creditworthiness, e.g. prior foreclosures, bankruptcies, etc. When it comes to income, the asset-based approach doesn’t require borrowers to provide pay stubs, tax returns, nor financial statements to verify the borrower’s ability to repay the loan.

As a guarantor of a borrowing entity it is key to understand the pros and cons of each financing option to be able to compare and analyze the most beneficial route to take based your investment needs and financing execution speed.

Leveraging the equity on your collateral makes asset-based lending the way to go for speed and less paperwork. At Vaster Capital, our programs are designed for experienced real estate investors with clear objectives. Our approach is to assess both the attractiveness of the collateral and the financial strength of the borrowing entity and its guarantors to enable us to provide you with higher loan to values at attractive interest rates.


George Fraguio
GEORGE FRAGUIO
VP of Origination, Vaster Capital

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Image Credit: fran_kies/Shutterstock.com

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