Huntington Beach, CA There was a recent conversation with a client that I wanted to share because it had to do with asset based loans and what is required to receive one.
This particular request was for the purchase and eventual development of a lot in an in-fill location along the California coast. The asset, raw land with existing income from a billboard on the property, was specially zoned by the City. The basic requirement was that the property had to have a commercial element to it. Of the approved uses on the table were an ice cream shop, bed and breakfast and general retail. The request we received was for the purchase of the land and development of a bed and breakfast.
The land was listed at a price of around $800,000 for a small 2,600 SF parcel. The borrower felt that she could get the price down a bit, but only had a max of $100,000 to put toward the project out of her own resources. She was looking for an asset based loan secured by the real estate. The plan was to acquire the property first, then begin the process of City approval and permits for the bed and breakfast. Sounds easy enough on the surface.
In the last post, I wrote about having the cash flow in addition to the collateral in order to improve your chances on being approved for an asset based loan. There is one other very important piece, and that is, experience. The borrower on this project had some experience in marketing for a bed and breakfast, but no direct operational or ownership experience. This experience is critical to the request and something banks and lenders look at closely when considering an asset based loan. As most people are aware, most businesses fail with in the first 3 years and lack of experience could speed this average up to less than that. In this case, there was also very little, on a relative basis, coming from the cash resources of the borrower. A high loan to value is also not attractive when considering a pure asset based loan.
The three preliminary components to an asset based loan are collateral, capacity and experience. Collateral – is the collateral something of value and interest to the lender? Can it be easily liquidated in order for the lender to be repaid with interest in a reasonable amount of time? Capacity – does the borrower have the cash flow to make the monthly payments on the loan? Experience – if the use of funds are for a business acquisition or development project, does the borrower have experience in the industry?
If you meet these three criteria and are in the market for an asset based loan, we would like to hear from you. To your success!
Huntington Coast Capital, Inc.