Asset-Based Lending Gives You the Power to Say Yes
Asset-based lending is a type of financing that focuses on the value or earning potential of an asset, rather than the borrower’s financials in the underwriting process. This type of funding has proven valuable for hard-to-qualify borrowers who invest in commercial real estate. Typically, these borrowers/investors seek to finance deals involving residential 1–4 units, multi-family buildings, mixed-use, and small balance commercial properties.
By putting greater emphasis on a property’s value and revenue-generating potential—rather than the borrower’s personal income and credit history—asset-based lenders enable commercial mortgage brokers to meet the unique needs of real estate investors who are often tough to qualify. Such investors can include W-2 employees, self-employed investors, and small business owners who may not have a consistent and documented source of income or a well-established credit history.
Asset-based lending provides new opportunities for residential mortgage brokers.
Many residential mortgage brokers have discovered that arranging investment and commercial property loans can significantly enhance their earning potential by servicing an entirely new client base to replace or supplement their home finance business as interest rates begin to rise. In fact, many of Velocity’s broker clients have built a strong business from fulfilling the needs of under-served, independent real estate investors who find it difficult to obtain financing for their investments simply because they don’t fit the mold for a traditional bank loan. Servicing that niche audience generates the potential for additional revenue and diversifies a broker’s business offering in the same way that a diversified stock portfolio protects investors from a market volatility.
How does asset-based lending differ from traditional bank financing?
In asset-based lending, the property and its earning potential serve as collateral. Non-bank financial institutions that provide asset-based financing are often direct portfolio lenders that focus primarily on investment property loans.
Real estate holdings that generate income, whether single-family residences, apartment buildings, mixed-use properties, or commercial buildings, for instance, often provide enough collateral for the lender to absorb the risk of making an asset-based loan. This allows asset-based lenders to qualify investors who may not be candidates for a traditional bank loan.
For example, a successful fix-and-flip investor in the Northeast may find it difficult to acquire, renovate, and sell properties during the winter, thus creating inconsistencies in their income. Likewise, business owners who want to purchase a warehouse for a new company may not have an established credit history or deep financial statements. An inconsistent or undocumented income stream and a lack of credit lines can prevent these otherwise qualified investors from qualifying for a traditional bank loan.
Keeping it simple.
When you’re trying to close a real estate deal to take advantage of an investment opportunity or to grow your business, the last thing your clients want is a complicated process that creates frustration and anxiety. Yet, dealing with government-sponsored entities, like Fannie Mae and Freddie Mac, or large banks governed by depository restrictions often creates disappointments and delays that can stifle deals. Cumbersome and document intensive are words commonly used to describe the process.
When it comes to servicing real estate investors, there are two distinct benefits of asset-based lending: flexibility and simplicity. As a direct portfolio lender, Velocity owns and continues to service the asset-based loans we fund. That gives us the freedom to set our own underwriting rules and to provide more flexible financing options. Moreover, asset-based loans are far less complicated and therefore simpler to fund. They allow brokers to say “yes” when traditional mortgages lenders are forced to say “no.”
Cross-selling to create new opportunities.
Experienced residential mortgage brokers often find that offering asset-based residential investment property mortgages to their current clients isn’t as complicated and time-consuming as they thought it might be. Most of the forms are similar to those used in financing home mortgages, with the simple addition of rental comps to identify the property’s revenue-generating potential. However, offering rental property financing provides brokers with a more significant opportunity for repeat business. For example, when financing a home mortgage loan, brokers often have an opportunity to see their clients’ real estate holdings. This inside knowledge creates a cross-selling opportunity similar to offering home insurance with a current customer’s auto policy. Having additional products in your quiver allows brokers to expand their relationships with clients and drive more revenue.