In asset-based lending, it is critical that the income generating capacity of the asset serving as collateral is carefully analyze and fully understand. For example, the loan-to-value of income-producing property is largely determined by its net operating income (NOI) and loan repayment is primarily dependent on the property’s ability to service debt from cash flow.
Asset-based lending is often done based on specific equipment, real estate, car fleets, and an unlimited number of other assets.
The underwriting of CRE loans and other asset-based finance traditionally considers loan-to-value, net operating income and debt-service coverage:
- Loan–to-value (LTV) – The ratio of the maximum loan amount a lender is prepared to advance relative to the value of the eligible collateral, which is the loan amount divided by the market value of the collateral securing the loan.
- Net operating income (NOI) – The overall performance of a firm’s operations before considering nonoperating revenue and expenses, extraordinary items and income taxes.
- Debt-service coverage ratio (DSCR) – The financial ratio of net operating income to annual debt service, including insurance and maintenance, which indicates the ability of borrower to service its debt.
Virtually all leveraged loans and some weaker investment-grade credits are backed by pledges of collateral.