Today’s financial industry provides two basic lending options: cash flow based and asset based lending options. These loan types apply substantially dissimilar qualifying formulas, resulting in significantly dissimilar loan sums for the borrower. If you are seeking suitable financing for your business operations, learn more about cash flow lending and how it can benefit your company.
Asset Based Loans vs. Cash Flow Lending
Asset-based loans are based on the balance-sheet liquidation value of assets. If you do not have many assets, the loan amount is very small.
Cash flow-based loans, on the other hand, are based on past and predicted future cash flows. This structure can give a substantial amount of funds if your company has a good cash flow and a low asset intensity. This is frequently utilized by high-growth or acquisition-oriented businesses looking to grow and branch out. While cash flow lending is riskier for the lender and more expensive for the borrower, it usually has a revolutionary effect on business growth, resulting in a step change factor of expansion.
Cash Flow Lending Benefits
- Higher Funds
Instead of an advance rate against assets, cash flow loans are built upon various trailing EBITDA (earnings before interest, taxes, depreciation, and amortization). This frequently indicates that the business is eligible for a loan that is significantly larger; in some situations, up to five times what a bank would offer.
- Extended Flexible Terms
Cash flow loans often have terms of 5 to 7 years and are tailored to the borrower’s needs. A balloon payment is typically used to postpone repayment. This enables the borrower to postpone loan payments and use cash flow to expand their company.
- Less Collateral
Compared to a traditional bank loan, cash flow loans are typically unsecured or second liens. They will extend their lending beyond the company’s equity valuation, providing you with important financing to support expansion. A personal guarantee is not always necessary.
Cash flow loans are based on the enterprise value or equity worth of your company. They are more likely to contribute more finance for future expansion because they believe in the value of your equity.
- Inexpensive Equity
Cash flow loans come with higher interest rates but no company stock. Roping in a cash flow lender is preferable to recruiting an investor. You will get to continue keeping your shares and retain management of the company.
Picking the Right Type of Financing
Depending on the foundation of your company, you can select the right type of financing to ensure you receive the funds you need to expand and diversify your operations. Having the necessary funds will help support business growth which is crucial to sustain your operations in the long run. Whether you are running a startup or an established corporation, borrowing just enough money that is well within your financial means can help ensure steady repayments can be made each month. This will prevent jeopardizing your business finances and support better financial management.