Cash Flow Lending and Asset-based Lending: What You Need to Know

Business loans are one of the most commonly used resources for businesses of all sizes to secure the financing they need to grow their customer base, expand and generate more revenue. Whether you are an owner of a start-up company or a conglomerate, at some point in time, you may find yourself in need of additional capital. The good news is, if you need to secure more capital for your business, there are plenty of options available today.

Commercial business loans are lending products offered to business owners to finance the growth of their businesses by banks and other traditional financial institutions. Specifically, many small businesses use commercial loans to fuel their growth and finance their day-to-day operations.

When a business entity seeks external financing from banks or other financial institutions, there are generally two options available: secured and unsecured loans. Within these two broad categories, banks and financial institutions offer a wide range of lending options. Secured loans are lending products which need to be backed by collateral, which are valuable possessions, such as a business equipment or vehicles. Accordingly, with a secured loan, the lender can take possession of the collateral if you the loan is not repaid as agreed. In contrast, an unsecured loan is not protected by any collateral. Cash flow lending and asset-based loans are two of the most common types of unsecured loans. In this post, we will discuss these two types of lending options in detail to help you decide which type of lending product is most suitable for your requirements.

Cash Flow Lending

Cash flow lending is a type of lending product where a certain amount is borrowed from a bank or a financial institution based on the projected future cash flow of a business entity. Here, the lender or financial institution will grant a loan to a business based on its past and future cash flows. In simple terms, cash flow lending involves a business borrowing money from expected revenues it will receive in the future. Moreover, banks and other financial institutions will also check your credit ratings prior to approving a cash flow loan.

Cash flow lending can be helpful to businesses that generate significant amounts of cash from their sales but don't have significant physical assets (such as equipment) which could be used as collateral. Moreover, this lending option can be an effective solutions for seasonal businesses during times when business is slow to take care of expenses such as payroll obligations and office overhead costs. Moreover, cash flow loans can be used to pay salaries of employees during the off season, and your revenue picks up again, you can simply pay back the loan. In addition, the processing times for cash flow loans are typically shorter compared to other traditional commercial business loans. 

Before a lender accepts your cash flow proposal, they will examine your expected future revenues, credit history and rating and the enterprise value of your company. Although this financing option is very convenient for start-ups that lack any types of physical collateral, cash flow loans often involve higher interest rates compared to traditional business loans as, as they involve greater risk for lenders.

Asset-Based Lending

Asset-based lending is a type of lending product that allows businesses to borrow money based on the liquidation value of the assets on their balance sheets. For this type of loan, cash flow is not the primary determining factor to accept the loan proposal as lenders check out the inventory, accounts receivable and other balance sheet assets. Here, tangible physical assets such as real estate, land, properties, company inventory, vehicles, industrial machinery and equipment include assets that are offered as collateral while acquiring asset-based loans. If, in any situations, if a recipient fails to repay the loan or defaults, the lender can levy and sell the collateral to recoup defaulted loan values.

Asset-based loans are the best option for stable businesses with assets that can be financed. Asset-based lending can be a great option for businesses that require working capital to operate and grow.  

Moreover, it is important to know that these loans have a strict set of rules when it comes to the collateral status of the borrower’s physical assets. For instance, a business cannot offer the same property to more than one lender as a form of collateral – taking a second loan on the same collateral is illegal. Also, the due diligence process for this type of loan is lengthy and complex. Asset appraisals, the analysis of financial statements, accounting and tax inspection and other formalities are completed before issuing the loan.

Conclusion

Cash flow lending and asset-based lending can be great options to bring your business on track and provide the capital you need to cover your operating expenses or to expand your business. However, if you are still unsure which type of loan would be best for your requirements, it is best to consult your business advisor to discuss your goals, business needs and your capacity to repay the loan.