Asset Based Financing, Alternative Ways Of Financing, Large Commercial Real Estate Projects

By Author: John Tang
Total Articles: 512
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Traditional financing provides much needed funding to advance major commercial or other tangible projects, and it is particularly beneficial to companies that plan months in advance. But what happens when funding is required immediately or clients have minimal experience? Asset-based financing can help clients avoid the complexities involved with traditional financing methods.

The Challenge
Because of many lenders' strict guidelines, the types of large commercial projects they will finance are limited. These agreements involve formal appraisals, third-party reports and approval from loan committees. In many cases, clients also need previous experience or equity partners to qualify. The approval process is long, complicated and uncertain. Commercial financing may also involve last-minute surprises should the bank or financial institution change terms or pull funding altogether. Even with adequate assets, the project may not garner approval. Worse yet, a bank can call its notes due at any moment, because its lending guidelines may have changed or their investors or regulators may not be satisfied with the lending ...
... institution's choice of investments. This leads some clients to private investors (hard money), introducing even more challenges, including higher rates, lower LTVs (loan-to-values), shorter terms, higher fees, and more exposure to failure of the project because of external or internal factors.

The Solution
In situations that involve a commercial or other tangible project, asset-based financing provides a much faster and more direct path to approval. Asset-based funding leverages the client's existing assets, in most cases eliminating appraisals, third-party reports and loan committees. Furthermore, this option provides elevated client privacy. Asset-based financing does not require business experience or equity partnership, with approval in as little as 3 to 5 days and expedited funding in 30 to 60 days.

For example, an affluent client of Three Dimensions Banc Corporation was trying to get financing for various projects (commercial real estate and other tangibles) in the US and overseas, but was frustrated by aspects of the process of funding, such as underwriting and other third party reports. The client was turned down for financing at the closing table even though he had a firm commitment from the lenders and had spent a lot time and money.

When Three Dimensions told him about the unique approach of asset-based financing, the client was curious but not convinced that it was a viable solution. Three Dimensions was able to show him that the only way he would not get funding would be if the financial instrument he provided was not valid or he was on the watch list. With this solution, he was able to get his projects funded very quickly while working on multiple projects. He also was able to get extended terms based on his needs, rather than conforming to the lender's guidelines.

To launch the process, clients simply request a letter of credit (LOC), issued by an investment-rated bank. LOCs are bank-issued financial instruments guaranteeing payments for a specified duration, given that the instrument's conditions are met. The LOC, also known as Standby Letter of Credit (SBLC) or Irrevocable Letter of Credit (ILOC), must be unconditional. Clients must also have adequate support assets. Investment-rated banks issue these directly to the client, with rating requirements based on the type and amount of financing.

Many developers use asset-based financing to avoid the hassles involved in proving the viability of their project to a traditional finance company. Because asset-based financing is leveraged against existing collateral, it is all the support needed to close a deal.

Flexibility is yet another perk. With terms based on the amount and type of financing, clients might benefit from monthly compounded interest and payments to simple interest terms with deferred payments and no pre-payment penalties. Flexibility increases for LOCs greater than $100 million. Furthermore, financial instruments are adaptable to meet the client's needs. Many LOCs have an evergreen clause, which means they can be renewable, larger projects drawn out over time if needed.

The greatest benefit of asset-based financing to the client is an increased LTV ratio, which can be significantly higher than that for traditional commercial financing, escalating to as much as 100 percent of the clients' LOC face value. These higher LTVs reduce a borrower's upfront cash requirements significantly. When combined with expedited approval, developers have a fool-proof path to success.

The Ideal Client
Asset-based financing is ideally suited to large business entities, developers, and private equity funds, principally those in the real estate industry or those primarily focused on tangible assets. Hedge funds are also strong candidates, minimizing project risk by using advanced investment strategies. Asset-based financing can also provide a convenient funding environment for offshore development projects. With the added privacy provided by asset-based lending, developers can now finance a diverse array of projects globally that may not have been attainable before.

With this new and exciting finance approach, you can now fund any project: globally, with privacy, without the hassles of traditional finance methods, and in an efficient manner.