Asset Based Lending for Fix and Flip Projects

In the realm of real estate investing, securing financing for a prospective project is often cited as the most complicated step in the process. While some investors are able to pay out-of-pocket to fuel their real estate ventures, many investors do not have that ability, leaving them searching for credible lending options.

While traditional bank loans may be a good fit for some situations, most investors who are not able to pay out-of-pocket turn to asset based lenders to fund their projects. Especially in the fast-paced environment of the fix and flip market, asset based lending becomes the best option for investors. But what is asset based lending? Who uses it and how can it help fuel your next fix and flip venture?

What is Asset Based Lending (ABL)?

In short, asset based lending or ABL is exactly what it sounds like – loan programs based on the assets which the loan applicant possesses. This means that instead of calculating loan possibilities based on tax returns or bank statements, asset based lenders take assets such as real estate owned by an applicant as financial collateral when designing loans. Asset based lending is something which investors and business owners of all origins can consider when seeking financial support.

How does ABL work?

The basic function of ABL is designed around the concept of the Loan-to-Value Ratio. There are a few industry standards set by asset based lenders which provide that certain assets are worth more than others when designing the Loan-to-Value Ratio (LVR). Essentially, the more liquid an asset is considered, the more collateral it is worth in the eyes of lenders. More liquid assets include accounts receivable, marketable securities, and properties while less liquid assets include physical components such as machinery and equipment.

When establishing an LTV, lenders already have a percentage in mind for how much of a loan they can offer based on the value of the assets being loaned against. For example, many asset based lenders who loan to real estate investors typically loan between 60 and 70 percent of the property’s value, meaning that:

If you are seeking to take a loan out on a property valued at $1,200,000 from a lender who designs loans around a 70% model then the LTV calculation will be designed as follows:

  • Loan Amount = Loan-to-Value Ratio Asset Value
  • Loan Amount = 70% $1,200,000
  • Loan Amount = $840,000

While goal percentages vary from lender to lender, you can begin to calculate how big of a loan you can expect from an asset based lender before even submitting an application.

Why is ABL good for Fix and Flippers?

The real estate market is hot. Being able to compete with cash buyers when investing in fix and flips is critical to a successful investment career and ABL makes it possible to collect a majority of the funds you need for a project quickly. Because asset based lending does not require a fine-tooth comb through your bank statements to award loans, asset based lenders can provide you with your loan in a matter of days instead of months like a traditional loan.

At EMCAP Lending, we practice asset based lending in order to ensure your success when navigating the fix and flip market. To find out more about how the experts at EMCAP can help your real estate ventures succeed, contact us today or begin your process with our brief loan prequalification form. We look forward to working with you!

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