A short term loan which is backed by a company’s assets is known as an asset based loan. Possessions such as real estate, equipment, or inventory are utilized to secure the loan.
Equity based lending is a good option for borrowers who do not meet regular lending standards. These include those that have poor credit, little income, and minimal money to place as a down payment.
Loans typically do not exceed a 50 to 65% loan to value ratio (LTV). The business is risky as the borrower has invested very little in the deal and can easily walk away. In case of a default, the lender would use the equity to obtain past due interest on the loan as well as pay for property taxes, lawyers, and fees associated with the foreclosure.
Secondary financing is typical in asset based lending. The lender will allow this if they are satisfied with the equity which they will retain. A second mortgage from another lender is acquired to reach the full amount of the properties value.
Some lenders place restrictions through designating a specific Combined Loan to Value (CLTV) ratio. For instance, if the CLTV is 90, then the borrower would only be expected to pay for 10% upfront. This arrangement is especially dangerous for the secondary lender. Secondary financing is often used if the lender wants to sell his property quickly.