Asset Backed Lending

 

Asset-backed lending can make sense in certain situations, but it’s important to carefully consider your specific financial circumstances. Here are some key points to help you determine if asset-backed lending might be appropriate for you:

Potential Benefits

Tax Advantages: Asset-backed loans can help you avoid triggering taxable events that would occur if you sold assets outright. This can be particularly beneficial if you have highly appreciated assets with a low cost basis.

Asset Preservation: By borrowing against your assets rather than selling them, you can maintain ownership of potentially appreciating investments.

Flexibility: Asset-based loans often have fewer restrictions and covenants compared to traditional bank loans, providing more flexibility for borrowers.

Important Considerations

Asset Requirements: You’ll need significant liquid assets to qualify. Typically, lenders consider assets like bank accounts, investment accounts, stocks, bonds, and mutual funds.

Loan-to-Value Ratios: Lenders may only oer a percentage of your asset value as a loan. For example, you might get 60% against certain investment account values, and 100% of for liquid assets like cash.

Interest Rates: Asset-backed loans often have higher interest rates compared to traditional mortgages. However, rates can vary significantly based on factors like credit score and loan size.

Risk: You’re putting your assets on the line as collateral. If you default on the loan, you could lose those assets.

When It Might Make Sense to Consider Borrowing Against Assets

Asset-backed lending could be appropriate if:

  1. You have significant liquid assets but lower income (e.g., retirees or self-employed
    individuals).
  2. You want to access funds without selling appreciated assets and incurring capital
    gains taxes.
  3. You need financing for a short-term opportunity and traditional bank loans are too
    restrictive or time-consuming.
  4. You’re confident that your assets will appreciate at a rate higher than the loan’s
    interest rate.

When It Might Not Make Sense to Consider Borrowing Against Assets

Asset-backed lending may not be suitable if:

  1. You don’t have substantial liquid assets to use as collateral.
  2. You can qualify for traditional financing with better terms and lower interest rates.
  3. You’re not comfortable with the risk of potentially losing your assets if you default on
    the loan.

Remember, while asset-backed lending can oer some advantages for high-net-worth
individuals or those with unique financial situations, it’s not always the best choice for
everyone. It’s crucial to carefully compare the costs, risks, and benefits against other
financing options and consult with a financial advisor before making a decision.

 

https://griinfunding.com/non-qm-mortgages/asset-based-loans/

https://www.investopedia.com/terms/a/assetbasedlending.asp

https://www.schwab.com/learn/story/3-ways-to-borrow-against-your-assets

https://www.schwab.com/learn/story/why-asset-backed-borrowing-may-make-sense-now

 

Important Considerations and Disclosures

This article is provided for informational and educational purposes only. It is not intended and should not be construed as individualized advice or recommendations of any kind. Kinney Munro Wealth Advisors uses a range of strategies to assist clients in managing concentrated equity positions, but no investment strategy can eliminate risk or guarantee success. Investments involve risk, including the potential loss of principal. Clients should consult with their tax advisors and legal professionals before implementing tax-related strategies such as CRTs, swap funds, or VPF contracts. All options strategies and forward contracts involve risk and may not be suitable for all investors. The firm’s role is to offer guidance and tools tailored to the individual circumstances of each client, and all decisions should be made in alignment with the client’s overall financial plan and objectives.

 

Call us at KinneyMunro Wealth Advisors. We can help.