As published in Scotsman Guide's Commercial Edition, July 2005.
It’s hardly a secret that banks do not lend to everyone. While this has always been the case, it has become much more apparent in recent years.
A wave of bank mergers has led traditional lending institutions to clean up their balance sheets and focus efforts on their largest and most-creditworthy borrowers. This development has created a vacuum and resulted in a dilemma for smaller, non-investment-grade borrowers who are attempting to grow their businesses.
Every vacuum represents an opportunity. So who has been picking up the slack? The niche asset-based lender.
Traditional lenders have been inflexible about their specific lending guidelines. Their sole concern has been whether borrowers can service a debt (i.e., make monthly payments). This is because banks traditionally have not been in the business of foreclosing on collateral or reselling foreclosed property.
This inflexibility has created a profitable niche for asset-based or liquidation lenders. Niche asset-based lenders exist in many shapes and sizes and structure deals in a variety of ways. Most commonly, these lenders use private loans that are highly collateralized. For asset-based lenders, the key component in evaluating potential deals is the asset value, not whether the borrower can make monthly payments. Examples of asset-based loans are hard-money loans and those secured by real estate.
While organizations that provide loans secured by real estate have existed for decades, the deal flow has grown exponentially in the past few years. More recently, managers have started offering investors access to such deals via hedge-fund structures by allocating to niche asset-based lending strategies.
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