If you remember from previous blogs, one of the ways to obtain funding for your business is through asset based funding. This path requires you to pledge an asset in order to receive funding. Real estate loans fall under this segment which includes everything from commercial and residential loans, conventional and non-conventional loans, bridge loans, and more. Another product that falls under asset based funding is equipment and stock loans which also require you to pledge collateral.
So, what are the pros and cons of Asset Based Funding?
As mentioned above, asset based funding requires assets to be pledged. Some may consider this a disadvantage but it’s important to understand that assets are required to be pledged for all collateralized based loans. Asset based funding can be used in two ways. The first way is that you may borrow money to purchase an asset and the second way is if you use your assets to pledge as collateral. For example, in real estate, if an asset is pledged, the lender will place a lien on the property and if you want to sell it in the future, you’ll have to pay off that lien before it can be transferred to someone else. The same is true for equipment funding. If you have a lien on your vehicle and you want to sell it, you’ll have to pay that off before you can transfer the title over to another party. When it comes to equipment like office furniture or other equipment that does not have a VIN or parcel number, the lender can file a UCC filing which is essentially a legal notice with the Secretary of State showing that they have a security interest against one of your assets.
Since asset based funding requires third-party involvement, there is more documentation needed than the other paths of funding we’ve previously talked about. Some of the documentation may include an Appraisal, Title, or inspection when it comes to real estate. If we’re talking real estate rehab, there’s even more documentation required because it will require further inspection after the rehab is complete. There are a lot of moving pieces in this type of lending option. Once the lender funds the loan, the collateral must also be filed with the state or local government in order to place a lien on the parcel. Since there are several third parties involved, it’s not just a quick A to B transaction because each party will have their own documents that go with the transaction. While this is all true for real estate, funding for equipment or stock loans doesn’t consist of as many moving pieces but there are still third parties involved and verification required so that they can protect their interest.
An advantage of asset based funding is that since you are putting up collateral for the loan, the risk is lower which will mean your interest rate will be lower as well. However, lenders who provide asset based funding do have immediate recourse in case of default so they can seize the property to recoup their loss.
An important thing to mention with asset based funding is that it is a great way to build wealth. When it comes to real estate, you can actually purchase a property and then flip it, or wait until it increases in value and then sell it. If you re-invest the funds in another real estate property within 180 days, you don’t have to pay any taxes on your profits. This is a strategy a lot of real estate investors use to build their wealth because they can do it over and over again with no limit! Then, once you have built up your real estate portfolio, you can borrow money using the real estate collateral and live off the loan you borrowed. We help real estate investors build their wealth this way regularly at Pennington Consulting Group.
To review, asset based funding is a great path to take when you’re in real estate or needing funding for equipment or stock loans. It will require that you pledge an asset but this will also result in a lower interest rate for you and give you the ability to generate wealth!
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