Real Estate Finance or Asset-Based Lending

When you are purchasing a new property for your business, expanding existing premises, or simply making alterations to your workspace, you’ll be faced with a choice: to outlay the cost upfront or to finance it. 

While some may not have the capital to finance this kind of expansion outright, there are benefits to the finance option that even those with the capital may want to benefit from. 

“Finance solutions are not only for those who are looking to purchase properties which they don’t have the capital for. These solutions offer many benefits to businesses. In fact, I’d argue that any business looking to expand its asset portfolio should exclusively finance – it’s just a smart way to grow,” says Fred Paatz, CEO at Express Business Funding. 

Before looking at the benefits of financing growth, however, it’s important to distinguish what finance options are available to businesses. This article assesses two options in particular: Real Estate Finance (and the many forms that RE Finance comes in) and Asset-based Lending. 

 

What is Real Estate Finance? 

The difference between RE Finance and ABL can be easy to understand, when you make one simple distinction: RE Finance offers capital to a business when there is no asset to secure the loan, while ABL, on the contrary, extends credit to a business when there is an asset that can be used to secure the finance. The below are examples of Real Estate Finance:

Construction Loans: Businesses needing to construct new buildings or undertake significant renovations can obtain construction loans. These loans provide financing for the construction phase of a project and are typically structured to cover the costs of labor, materials, and other expenses associated with construction. Construction loans may have variable interest rates and require interest-only payments during the construction period before converting to a permanent mortgage.

Commercial Real Estate Lines of Credit: Similar to personal lines of credit, commercial real estate lines of credit provide businesses with access to funds for real estate-related expenses on an as-needed basis. This type of financing offers flexibility, allowing businesses to draw funds when necessary and repay them as cash flow permits.

Commercial Real Estate Investment Loans: These loans are tailored for investors looking to purchase income-producing properties such as apartment buildings, retail centers, or office complexes. These loans may have different underwriting criteria compared to owner-occupied loans and typically require a larger down payment.

 

What is an Asset-based Loan? 

An asset-based loan is a type of loan secured by collateral or assets owned by the borrower. Unlike traditional loans where the borrower’s creditworthiness and income are the primary factors considered for approval, asset-based loans rely on the value of the borrower’s assets to secure the loan. The assets used as collateral can vary widely and may include real estate, inventory, equipment, or other valuable assets owned by the borrower. The lender assesses the value of these assets and determines the loan amount based on a percentage of the appraised value of the collateral.

Since asset-based loans are secured by collateral, they often carry lower interest rates compared to unsecured loans. However, borrowers should be aware that defaulting on an asset-based loan could result in the loss of the pledged assets to the lender through foreclosure or repossession. Overall, asset-based loans can be a valuable financing option for businesses looking to leverage their assets to access capital, but borrowers should carefully consider the risks and obligations associated with these types of loans before proceeding. Some examples of Asset-based Loans include:

Commercial Mortgages: Similar to residential mortgages, commercial mortgages are loans secured by commercial real estate properties. These loans typically have longer terms than residential mortgages, ranging from 5 to 25 years, and may have fixed or variable interest rates. The property being financed serves as collateral for the loan.

Bridge Loans: Bridge loans are short-term financing options that help businesses bridge the gap between the purchase of a new property and the sale of an existing property or until longer-term financing can be secured. They can be used to finance acquisitions, leasehold improvements, or other short-term real estate needs.

Mezzanine Financing: Mezzanine financing is a hybrid of debt and equity financing that provides businesses with additional capital to fund real estate acquisitions or developments. Mezzanine loans are subordinate to primary financing but rank above equity in terms of repayment priority and typically carry higher interest rates.

“I recommend that you shop around for Asset-based Loans. Some finance agencies will use the guise of “alternative finance” to tack high-interest rates onto your loan or include predatory obligations to the deal if they see you have not done your homework. ABL is an exceptionally useful tool, but you have to make sure you’re working with the right team when you make use of the service,” says Paatz. 

 

Should you finance or purchase outright? 

There are benefits to both financing and purchasing a property outright. You must understand the benefits of each and determine which would meet the needs of your business. 

 

Benefits of Financing:

Preservation of Capital: By financing a new business property, you can preserve your capital for other business needs such as inventory, marketing, or operational expenses. This can help maintain liquidity and provide a financial cushion for unexpected expenses.

Leverage: Financing allows you to leverage your investment. You can acquire a larger or better-located property than you could afford to buy outright, which could potentially lead to higher returns on investment in the long run.

Tax Benefits: Depending on your jurisdiction, you may be able to deduct finance interest and property taxes from your business income taxes, providing potential tax benefits.

Building Credit: Making regular mortgage payments on a commercial property can help you build your business credit profile, which may be beneficial for future financing needs or credit applications.

Predictable Costs: With a fixed-rate facility, your monthly payments remain stable over the life of the loan, providing predictability for budgeting purposes.

 

Benefits of Buying Outright:

No Interest Costs: Buying a property outright means you don’t have to pay interest on a loan, potentially saving money over the long term.

Ownership and Control: Owning the property outright gives you complete control over its use, allowing you to make modifications or expansions without seeking lender approval.

Flexibility: Owning the property outright gives you flexibility in terms of exit strategies. You can sell or lease the property without the constraints of a mortgage.

 

RE Loans vs Asset-based Loans: 

Which finance option you choose is ultimately based on your needs and another decision you will have to make by weighing up which benefits will best service the needs of your business. 

The EBF team is here to help in your decision-making if you are having trouble weighing up which option would suit you best. If you would like to book a consultation with us, get in touch with us here. Alternatively, reach out to Fred Paatz here.