More businesses today are borrowing against their assets, including real estate property, inventory and receivables. Asset-based lending (ABL) offers flexible financing, improved liquidity and scalability. When you couple it with the fact that regional banking is pulling away from ABL, lenders are at an advantage to negotiate appealing pricing with robust asset and structural protections.
Despite the economic turbulence of 2023, the ABL market experienced growth, and this trend isn’t slowing down. According to the Business Research Company, the ABL market will grow from $697.75B in 2023 to $787.28B this year at a compound annual growth rate (CAGR) of 12.8%.
ABL provides borrowers with faster access to capital, options when it comes to loan structure and an opportunity even for those with limited credit history or lower cash flow from the property. For lenders, ABL offers less risk than unsecured lending since the loan is secured by an asset.
ABL is a key financial tool in the commercial real estate (CRE) market since it offers flexibility in focusing on asset value rather than credit history. CRE ABL differs from traditional ABL primarily because of the nature of the collateral, the complexity of the transactions and the specific risks associated with CRE. To make sure the process for asset-based lending for commercial real estate goes as smoothly and efficiently as possible, here are five tips for lenders:
1. Perform Property Due Diligence
The due diligence process in CRE lending is more extensive, often involving detailed property appraisals, environmental assessments and inspections. Use reputable third-party appraisers and ensure regular re-evaluations to account for market fluctuations. Perform environmental assessments and structural inspections to identify any potential issues that could affect the property’s value or usability.
2. Keep Abreast of Legal and Regulatory Compliance
CRE loans are subject to a variety of local, state and federal regulations, as well as zoning laws and building codes, which creates layers of complexity to the lending process. Stay updated on local, state and federal regulations to ensure your lending practices comply with all applicable laws and standards. In addition, it’s wise to regularly conduct legal reviews of loan agreements and collateral documentation to ensure all terms are enforceable and protect the lender’s interests.
3. Ensure Active Loan Monitoring
CRE loans require active management and monitoring to ensure the property maintains its value and generates sufficient income. This includes regular property inspections and financial reviews. Loan origination software enables lenders to remain connected to client accounting systems to monitor their financial health. Advanced software offers automated reporting, so program portfolio, banking, financials and other intelligence reporting can go straight to your inbox weekly or at any interval.
4. Manage Risk with Best Practices
CRE is highly susceptible to market cycles where economic downturns can significantly affect property values and rental incomes, impacting the borrower’s ability to repay the loan. For proper risk management, lenders can:
- Leverage advanced software that takes unique lender risk criteria and automatically applies it to each loan to reduce manual work and reveal red flags and other alerts to quickly shed light on troubling areas in a prospect’s application, financial health and banking transaction history
- Use regular property appraisals to ensure collateral remains sufficient to cover the loan
- Diversify the loan portfolio across different types of commercial properties and geographical areas
- Implement continuous credit monitoring to detect early signs of financial distress
5. Leverage Advanced Technology
The right commercial lending technology simplifies processing, approval, tracking, and managing of loans. Advanced software like Decipher automates analysis using customer, business and third-party data to facilitate real-time decisions. Lenders can use analytics to gain deeper insights into performance and market trends. Powerful decisioning tools enable lenders to approve prospects more efficiently and do reviews on current customers.
Competitive lending software uses artificial intelligence (AI) to enhance the commercial loan process for lenders. Decipher Credit’s system uses AI-driven optical character recognition technology to facilitate uploading of invoices, customers, balance sheets and P&L statements for instant processing and spreading. Decipher can take a detailed aging report in any format (Excel, PDF) from a customer’s accounting system and apply AI to that file to automatically spread the aging to indicate to the lender how much is eligible. This saves the lender the trouble of having to look at the report manually. Few lending platforms offer this and with expertise that is specific to ABL.
Decipher Credit was made to facilitate asset-based lending. It was designed by ABL experts who understand the pain points of the day to day, plus what you need to ease them. Our highly configurable and robust cloud-based commercial lending platform automates and streamlines the entire process from start to funding.
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