Unsecured vs. Secured Lending:
As we discussed before, P2P lending/crowdlending provides an investor with a low volatility, monthly fixed returns generating passive income. Reamerge provides its members with a “P2P” or “P2B” lending platform. While LendingClub and Prosper offer investors unsecured loans, Reamerge offers investors opportunity to invest in loans secured by real estate, or other forms of assets (inventory, equipment etc).
What is the advantage here? Unsecured loan is not collateralized and if the borrower files for bankruptcy or fails to meet debt obligation, this presents lender with little or no recourse. The lender will have to file suit against the borrower or turn to collection agency.
On the other hand, secured loans backed by an asset are collateralized. This is usually in the form of real estate and/or UCC filing (equipment or inventory). In fact, Reamerge goes for further assurances with a personal guaranty for the borrower AND additional two guarantors with high FICO scores. These serve as collateral against default. This is the cushion or margin of safety. This can be captured easily in a ration called LTV– or loan to value ratio. If borrower defaults, Reamerge can sell liquid assets in inventory or equipment or foreclose the business property to recoup the investment. Reamerge usually has junior position on its loans.
The Capital Stack:
In any real estate related investment (here even though on the Reamerge platform we are investing in business loans, they are businesses with underlying real estate nevertheless), payout to investors is dependent on a “stack”. This means that lenders in senior position – or a first lien on the property – get paid first. After that mezzanine loans are second liens on the property that come next in the payment scheme and finally investors who are invested in the property on the equity side (think of investors who bought shares in the property and will profit from appreciation of its value). In case of a default by the borrower, the foreclosure on the property will result in the proceeds first going to senior position debt, then mezzanine and finally equity shareholders.
It should be noted that the business loans are carefully pre-vetted on the Reamerge platform. Reamerge primarily focuses on cash flowing business with high yearly revenues. While security – whether UCC filing and/or real estate – provides collateral, an established cash flowing business with 5-10 year history remains the proven strategy for loan consideration as this provides one of the best data point for borrower business ability to pay the loan. By contrast, in mortgage loan industry, some of the riskier loans are based predominantly on the foreclosure or liquidation value of borrower’s collateral rather than on borrower’s ability to repay the mortgage. Such an approach allows for riskier loans, but is NOT considered by the Reamerge platform as a good strategy (you only have to go to 2008 real estate meltdown to see this).
In the next post we will shed some light on the strict underwriting criteria of the business loans and where the property values fit in the margin of safety model.
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