Leveraging Commercial Real Estate in Asset-Based Lending

The Federal Reserve Board’s recent survey of senior loan officers revealed that commercial lending standards are tightening. Loan officers are reporting tighter credit standards and terms in both Commercial & Industrial (C&I) and Commercial Real Estate (CRE) lending. Market uncertainty, tightening loan spreads and reduced risk tolerance have contributed to decreased loan volumes and less demand for commercial loans.

The lower loan volume and lower demand reported in the survey do not necessarily mean that businesses are not in need of funding, but rather that market conditions require another approach to lending. Less demand for traditional lending may, in fact, indicate more opportunity for asset-based lenders with those companies that have significant assets, but lack the capacity to borrow under traditional - and tightened - lending standards. As asset-based lending (ABL) underwriting evaluates a borrower’s ability to repay a loan based on their balance sheet as opposed to their cash flow, borrowers with significant levels of good quality assets may benefit from leveraging those assets as collateral. Lenders benefit as credit risk is reduced by the quality of collateral used to secure the loans.

Considering CRE

According to SFNet’s 2023 Market Sizing & Impact Study, receivables (59.6%) and inventory (29.8%) comprised the majority of ABL collateral in 2022. These short-term assets secure the short-term lines of credit. However, with uncertain economic conditions, ABL lenders may look to add additional security by considering owner-occupied commercial real estate as collateral.

Using CRE as collateral is not a standard practice for most asset-based lenders. In the SFNet study, property represented less than 1% of collateral for ABL in 2022 in part because using real estate to secure a 12-month line would require annual appraisals on the property at renewal, which is often seen as an unnecessary expense for that type of loan. While this may not be a typical practice, a business’s equity in its commercial real estate may be an untapped resource for borrowers in the current lending environment. From the lender’s perspective, securing the line with a valuable hard asset such as real estate strengthens their collateral position.

Finding New Opportunities

Using RelPro, asset-based lenders can identify businesses that own the commercial real estate that they are occupying. RelPro can reveal details of an existing CRE loan such as the type of property, loan amount, property valuation and more. Lenders can use these insights to build a targeted list of prospect companies that fit their strategy while also researching the company and its executives with accurate contact data. Armed with intelligence from RelPro, lenders can establish informed relationships with companies looking to leverage their assets to grow in the upcoming year.

As commercial lenders tighten their credit standards to account for economic uncertainty, companies that lack the cash flow to qualify for more restrictive lending standards may find accessible funding options through asset-based lending. For lenders, leveraging a company’s commercial real estate to secure a line of credit can further strengthen their collateral position. Commercial real estate as collateral represents an additional way for asset-based lenders to stand out from other commercial lenders and generate new business opportunities.