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Whether a company is just getting started or an established corporation, it relies on borrowed capital to run its operations. Business entities are presented with a wider array of financing options as compared to individuals which can make business borrowing much more complex. If you are looking for suitable financing for your business operations, find out more about cash flow based lending and how it can support your company.

Cash Flow Lending

Cash flow lending enables businesses to borrow money based on their projected future cash flows. This financing option involves a loan that is granted by the lender and is backed by the borrower’s past and future cash flows. By definition, cash flow lending is when a business borrows money from its projected revenues which they anticipate on receiving in the future. This type of lending also reviews the borrower’s credit ratings to determine their creditworthiness.

For instance, a company that intends to sustain its payroll obligations can utilize cash flow lending to pay its staff and repay the loan along with its interests on the generated revenues on a future date. No collaterals are needed on this type of financing but a portion of the cash flows are usually secured.

Cash Flow Underwriting

The underwriting of cash flow loans involves lenders examining future company incomes, its enterprise value, and its credit rating. This option is favored by companies as it is much faster to process without the need for any collaterals. Cash flow based loans are often underwritten by financial institutions through the use of a company’s earnings before taxes, interest, amortization, and depreciation, along with a credit multiplier.

Cash flow based lending lets lenders account for any risk brought on by economic and sector cycles. As many companies will see a decline in their company’s earnings before taxes, interest, amortization, and depreciation during an economic downturn, the risk multiplier used by the financial institution will simultaneously reduce. These two declining numbers combine to lower the available credit capacity for a company or increase interest rates if it has been stated as part of the criteria.

Cash Flow Suitability

Cash flow loans are more suitable for businesses that can keep high margins or are lacking enough hard assets that can be put up as collaterals. Business that meet these qualities can include marketing firms, service companies, and producers of low-margin products. These loans typically charge interest rates  that are relatively much higher as compared to other alternatives as they compensate for the non-requirement of a collateral which can easily be obtained by the lending institution in case of a payment default.

Business Loans Options

As businesses have a wider variety of loan options, you can carefully look through the pool of financing choices you have to ensure you pick the one that best meets your business needs. Whether you are running a startup or a mega organization, the key is to borrow something that is within your financial means. This will enable you to maintain steady payments month after month so as to sustain business growth.

If you are looking to expand your business and require financing, a loan may be essential to help kickstart your plan. You may not have a firm grasp on the financial growth of your business as well as its objectives, but you must quickly select a loan term that best matches your business needs. Before you derive with a decision, here’s what you need to know about short vs. long-term business loans and how to decide.

Short-Term Business Loans

Based on its name, a short-term business loan has a shorter repayment period which is usually up to a over a year. The benefit of a short-term cash loan is that it offers business owners with immediate liquidity for urgent needs that can include re-paying suppliers, stockpiling essential inventory goods, and filling a seasonal cash flow. Most often than not, business loans need some form of collateral to guarantee that you can pay your vendor adequately if monetisation fails. There is no collateral needed for short-term business loans and they require lesser paperwork.

Long-Term Business Loans

A long-term business loan has a considerable repayment period and can offer a larger sum of money. These loans can be repaid for up to five to ten years or even longer. Due to these factors, they can be used to purchase cutting-edge equipment, update one’s business infrastructure, and expand one’s business to new places. Long-term cash loans need a higher monthly payment so borrowers are required to put up a collateral to secure them. It is also much more time-consuming for long-term business loans to disburse the funds as additional paperwork is required to validate the loan application.

Short vs. Long-Term Business Loans

• Amount of Loan

The main difference between these two types of loans is the amount of each loan. The larger the credit, the longer the repayment period will be for most cases. Short-term business loans involve lesser money and shorter repayment tenures whereas long-term business loans are for larger amounts and longer repayment tenures.

• Collaterals

Since long-term business loans are for larger sums of money, a collateral is needed for borrowers to secure one. If the borrower fails to make monthly payments, the collateral may be used by the lender to recoup the financial losses. On the other hand, short-term loans do not require any collaterals so they are the more convenient and fast option.

• Interest Rates

Short-term business loans usually have higher interests which compensate for their short repayment period. In a typical scenario, short-term business loans without collaterals increase the risk of loan defaults by borrowers, hence the higher interest rates.

• Processing Time

The main reason for borrowers to choose short-term business loans is the instant disbursement they offer. Hence, the approval process for this type of loan is usually fast and straightforward. Long-term business loans, on the other hand, require a lot more paperwork such as the borrower’s business sheet to evaluate their creditworthiness. The approval process for short-term business loans take roughly 24 hours whereas long-term business loans can take much longer.

Small businesses are more likely to fall for business loan scams as they look around for fast financing options. There are many different types of loans available in the financial industry today that are offered online, and many companies have grabbed the opportunity to apply for one through the convenient way. However, scammers are also out to take advantage of the same situation to prey on desperate business owners. Here are several business loan scams that you need to watch out for.

Advance Fee

Advance fee scams promise potential victims a cheap debt relief if they can provide an advance payment that will be treated as a processing fee. As you might have expected, they then take your money and abscond without disbursing any funds. To avoid such scams, always remember that credible lenders will not ask for any advanced payments upfront. Most lenders will deduct any processing fees from the loan amount to be disbursed.

Peer-to-Peer Lending

Peer-to-peer lending is a legitimate financing option that provides funds through an online platform. This is a widely known option which scammers have joined in to target unsuspecting victims. Peer-to-peer lending scams promise an even easier application process without the need for credit checks. Do not fall for something like this that sounds too good to be true. Some warning signs you can look out for include advanced payments, incredibly low interest rates, and requests for wire transfers. If you are searching for peer-to-peer lending options, always apply with a reputable lender.

Consultancy Fee

Consultancy fee scams often reach out to their potential victims through emails or an online ad. The scammer promises to help you secure some type of financing but you need to pay a consultancy fee. After you have paid the fee, the so-called consultant will disappear and never to be contacted again.

Funding Kit

Funding kit scams are similar to consultancy fee scams. The scammer promises to help you secure a viable loan through the provision of a financing kit that can be priced at a certain rate. The kit is supposed to provide the victim with a sure way to secure financing with attractive loans which seem too good to be true. For those with little to no understanding of finance are at a higher risk of falling for such attractive scams.

Credit Repair

Most people know that a chance of getting a loan relies on their existing credit score. For those with bad credit, it can be exhausting having to be rejected by several lenders. Credit repair scammers promise victims to improve their credit score by a hundred points or more so they can have a better chance at securing a loan. The repair services often come with a fee but they are not legitimate as credit scores cannot be repaired that easily and quickly. The only way to improve your credit score is to work directly with your creditors and not some scammers who claim to have extensive financial background.

Collateral, or an asset pledged by the borrower to the lender for the duration of the loan, is frequently used to secure business loans. The lender may take that collateral and sell it to recoup their loss if you do not make payments on time each month. Collateral is a tool used by lenders to lower their risk of loan loss. The amount of collateral required can vary depending on a number of variables, such as your credit score, the type of lender, and the kind of collateral. Some lenders permit or demand that applicants pledge personal assets as collateral for business loans. Learn more about the different collateral requirements.

What Can Be Used as Collateral for Business Loans?

• Valuable Assets

A valuable asset can serve as collateral, although not all valuable assets can serve in this capacity, and some types of collateral are preferred over others. From the lender’s perspective, the best collateral is anything that can be swiftly liquidated, or immediately turned into cash. Cash is therefore a good choice for collateral. Securities can also be used as collateral for loans, including Treasury bonds, equities, certificates of deposit (CDs), and corporate bonds.

• Tangible Assets

Real estate, equipment, stock, and automobiles are examples of property that can be used as collateral for business loans. These are all physical, tangible assets that may be owned by the company or its owner, or may have loans secured against them. Hard assets, on the other hand, could be more difficult to sell and have an uncertain value. To confirm the worth of your hard asset, you might need to have it appraised in some circumstances.

• Future Earnings

Another category of collateral includes future earnings, such as accounts receivable, which are bills that you have already sent out.

• Personal Assets

Some business loans demand that you put up personal assets in addition to corporate assets, which can be your house or car. In the event that your business does not have enough assets to offer the necessary collateral, the Small Business Administration (SBA) may impose this requirement.

Collateral Requirements for Business Loans

One crucial indicator that lenders use to determine the collateral they require is the loan-to-value (LTV) ratio. LTV is the sum that a lender will advance to you in relation to the value of the security. For instance, if you use real estate as collateral for a company loan, a bank might give an 80% LTV ratio. As a result, even though the property is worth $100,000, it will only lend you $80,000. The discount is the distinction between the fair market value of the collateral and the loan’s principal; in this case, the discount is 20%. The discount on highly liquid assets will be smaller. Normally, a borrower should provide collateral equal to the loan amount. To assist in mitigating their risk, certain lenders, however, could demand that the value of the collateral be more than the loan amount.

“The Five Cs,” which are typical measures of financial health can help determine how much collateral you need.

• Credit history
• Capital
• Capacity for repayment
• Collateral

Conditions (interest rate, loan terms and amount)

Business entities are presented with a larger array of loan options to provide financial support for their operations. Whether you are running a startup or a giant corporation, having enough cash flow will help to sustain your business growth. Here, we have put together the different facets of cash flow vs. asset based lending which can help you pick the right financing option to suit your business needs.

Cash Flow Lending

A company’s cash flow can be defined as the amount of money that flows into and out of the company on a daily basis, which is what makes it possible for the company to stay in operation. In contrast to profits, cash flow refers to the money that comes in and goes out of an organization. Because of this, cash flow loans are an excellent choice for larger businesses that have a consistent pattern of cash flow.

Before deciding whether or not to provide a firm with the necessary capital, potential cash flow lenders will first evaluate the company’s credit rating and cash flow forecast. Businesses that have a high credit score and a continuous cash flow may find that cash flow-based financing is an excellent source of capital for their company.

Asset Based Lending

The difference between asset-based lending and cash flow lending is that the former option is a loan that is based on the value of a company’s physical assets. Asset-based lending is frequently comprised of multiple types of financing, such as invoice financing and a business loan. Cash flow lending, on the other hand, is based on the value of a company’s future cash flow.

This kind of financing is suitable for companies that have valuable property, automobiles, or equipment in their inventory. After using the company’s assets to free up capital, the corporation is then in a position to borrow money against the value of those assets.

Lenders will also choose loan terms based on the worth of the item, with the terms becoming more stringent as the value of the asset increases.

Cash Flow vs. Asset Based Lending

There are significant variations between the two loan options, despite the fact that they are both secure and suitable for firms seeking to effectively control their costs. Below are the key differences between cash flow vs. asset based lending:

• Cash flow lending is ideal for any business with a healthy cash flow, whereas asset-based lending is limited to businesses with tangible assets.
• The collateral is the next distinction between the two forms of lending, as asset-based lending is guaranteed by something concrete. However, cash flow lending is based on a forecasted estimate of cash flow, making it a greater risk for lenders, which may have consequences for businesses seeking this type of loan.

The form of lending you pick might also affect your ability to make repayment. For instance, if you have an agreement for a monthly payback on a cash flow loan but your cash flow is low that month, you may not be able to make the payment. Repayments on an asset-based loan are typically based on anticipated revenue from the assets, such as rental income from a property, which is a more stable source.

If you are looking to take out a business loan with no collateral, there might be a suitable option that can still provide you with the necessary funding. Take a look at the following options and pick one that best meets your operational needs.

Working Capital Loans

Working capital or cash flow loans are typically meant to assist firms in covering short-term costs like a projected cash flow shortage or an investment in expansion. Some instances are:

• improving a leasehold
• redesigning a website
• upgrading a product
• spending on marketing to boost sales
• recruiting new salespeople
• acquisitions of companies

Banks frequently demand security for this type of loan, commonly in the form of accounts receivable, merchandise, or the business owner’s own assets. If the loan is for a smaller sum, however, some institutions do not require one.

Market Expansion Loans

A working capital loan is comparable to a loan for market expansion. Often, a business can receive one without collateral if it has a good financial position and a proven cash flow. It is designed for companies that require funding to expand. Your market can be expanded, a new product can be introduced, or a new location can be opened with the funding. Usually, the terms are created to specifically address the requirements of expanding businesses. To safeguard the company’s working capital, they might incorporate flexible repayment options, such as structuring payments to increase or decrease depending on your cash flow, a simple re-advance process (a way to re-borrow money that you have already repaid on the loan), and paying off the loan without penalty.

Technology Financing

Similar to working capital loans, technology loans have terms that are especially tailored to businesses wanting money to invest in hardware, software, or IT planning, or technology corporations looking for expansion capital. Typically, these loans have flexible payback plans ideal for IT investments or businesses. This kind of loan may be approved without the business owner putting up any collateral, depending on the company’s financial standing.

Personal Loan

Some personal financing options, including credit cards and personal lines of credit, do not demand any collateral. If the sum is not paid off each month, the high interest rate on credit card debt, however, may make such financing unaffordable.

Family, Friends, and Angel Investors

Even though they could request a share in your company, your family, friends, and angel investors might be prepared to offer you money without requiring any collateral. Wealthy people who invest on their own or through angel investors in high-potential start-ups to offer early-stage capital are known as angel investors. They frequently look for an ownership share that can be sold for a healthy profit as the business develops. They also want to have the chance to advise the company to offer their contacts and knowledge.

Loan with no Collateral

Depending on how much financing you are looking at, and the current financial status of your business, you can still take out some form of funding to channel towards your operations. Pick the best type that you can repay on time each month to avoid falling into a cycle of debt.

In today’s highly competitive financial industry, borrowers are presented with a large array of financing options that can cater to their unique needs. If you are looking for a suitable option to finance your business operations, learn the different benefits of taking a small business loan. Follow our article for more information.

Kickstart Business

If you have decided to start a business but are short on funds, a small business loan can help kick things off. For some cases, you may secure a substantial amount of money which will ensure that you have no issues to cover the initial startup costs. However, it is not advisable to borrow much more than what you truly need, else you risk steering your business into a cycle of debt. The majority of cases, it is recommended to wait until your operations have stabilized over some time before pursuing a business loan.

Expand Operations

One of the key benefits of a business loan is that you can expand your business operations. Through the secured financing, you can stretch your audience reach or service locations to grow your business.

Build Business Credit

Borrowers have a higher chance at securing financing when they have a good business credit score. For startups and new business owners, a small business loan will provide you the chance to build your business credit score. As long as you maintain regular payments each month, you will achieve a strong score.

Buy Equipment

Equipment is an essential component of most businesses. If your operations require certain types of equipment that are costly, a small business loan can cover the associated costs. This enables you to keep other funds intact to develop on other areas of your operations. For those with outdated equipment, a small loan will also finance the cost of replacement.

Buy Inventory

For seasonal businesses, you may need to buy inventory during certain months. For instance, swimwear retailers earn the most revenue during the months of summer. Through a small business loan, you can use the funds to buy inventory during winter, in preparation of the upcoming summer so you can cut down on expenditure.

Save on Taxes

Business taxes can get pretty costly and there is no denying it. However, it is imperative that you make prompt payment to avoid being penalized. This can in turn implicate the financial health of your business as well as your overall business outlook. Through a small business loan, you can save on taxes because the interests are tax-deductible. You may be concerned about the possibility of the interest rate altering during your loan tenure, but this can be countered by choosing a fixed-rate option.

Taking a Small Loan

A small loan is a viable option for business owners who have just started out or looking for a small amount of funds to finance minor aspects of their operations. Small loans have lower interest rates, do not need a collateral, and are faster and straightforward. Depending on your business needs, you can consider a small business loan to enjoy immediate funds disbursement.

Today’s financial industry is getting increasingly competitive, offering a host of options and attributes to cater to the varying consumer needs. Before taking out any type of loans, it is essential for you to do some research on the different types of financing options to secure the most ideal one that best matches your unique needs. Learn more about the different types of small business loans that can help secure your secure your financing.

Business Line of Credit

For business owners looking for premium flexibility in their financing, a business line of credit is a viable option. The amount of loan can range anywhere from $1,000 to $500,000 and the funds can be disbursed typically within a week or two. For the interest rates, they vary and can range from 8 to 24 percent. Take note that business lines of credit are revolving, so borrowers can access the funds as many times as they need, instead of receiving a lump sum.

SBA Loan

The Small Business Administration (SBA) helps small businesses secure the financing they need to support their operations. Small business owners who have sought help elsewhere but failed to get financial assistance, the SBA can render the necessary help and resources. Borrowers can expect to get financing from $50,000 to $5,000,000 with loan repayment terms that range from 10 to 25 years. One downside that the SBA loan is known for is its exhaustive application process that can take an extended period of time and require a lot of paperwork.

Short-Term Loan

Short-term loans are very popular among borrowers who are looking for fast and convenient financing. The paperwork involved is usually much less extensive and funds can be disbursed within as little as only 24 hours. Short-term loans are highly recommended for unexpected expenses that can include hiring new staff, replacement of equipment, expanding operations, improving infrastructure, and others. The interest rates of short-term loans are typically much higher to compensate the non-requirement of a collateral.

Business Term Loan

A business term loan lets borrowers acquire working capital, purchase equipment, expand their business, and hire new staff. This has been a highly favorable option among business owners for decades as they are highly reliable. Fund are disbursed within a couple of days and can range from $5,000 to $2,000,000. A business term loan can be repaid between 1 to 5 years and its interest rates can start as low as just 6 percent.

Merchant Cash Advance

A merchant cash advance lets you borrow from your future earnings. Once you have gotten approved financing, you will only start its repayment through a certain agreed-upon percentage of your daily credit card deposits which will be withheld by the lender. Merchant cash advances are also fast in terms of funds disbursement within 24 hours and the amount can range anywhere from $5,000 to $200,000. Such convenience can be enjoyed at a much premium interest rate that can start from 18 percent. The application process for a merchant cash advance is also surprisingly simple and there is no collateral involved.

After having made a profit, businesses can put back some or all of that profit into their business to support growth. However, businesses may at times need additional financing from a credible lender and for most cases, they turn to banks for the necessary financing. If you are looking for alternatives to bank loan, we have put together a series of options for you to consider according to your business needs.

Alternatives to Bank Loan

Bank loans are highly common for small businesses that are looking for financing. However, some may find that the stricter lending policies make it difficult for them to secure loans which are crucial for their business operations. Thankfully, there are other alternatives to the traditional bank loan which businesses can turn to.

Business Line of Credit

A line of credit is an amount of money that is set which is for use by a business for financing purposes. The line of credit can either be secured or unsecured. Some form of collateral is required for a secured line whereas an unsecured loan does not. Once the line of credit amount has been paid off, the amount can be used again in the future.

Merchant Cash Advances

A business can receive a lump sum of money for financing through a merchant cash advance. This is made possible in exchange for a percentage of their credit card sales in the future. For those who receive regular credit card payments, this alternative is an ideal option.

Working Capital Loan

This loan helps a company to fund its core operations. This is useful when day-to-day operations are causing financial hardship due to factors like seasonal businesses or companies that are subject to cyclical sales. However, it is also not impossible for businesses from various industries to experience working capital shortfalls from time to time. A working capital loan is not a specific type of loan but more of a category of loans. Any type of loan that provide financing support for short-term business operations could be considered a working capital loan.

Equipment Loans

Equipment is an essential component of most businesses, hence if that equipment fails, the business operations can be adversely affected. In such times, many small businesses lack the capital to perform equipment maintenance. As business owners can make use of their equipment as collateral, they can get financing for a large portion of equipment cost.

Professional Practice Loan

This is a specialty loan that is designed to provide financing for accounting, legal, and medical professionals. Most of these loans cater to medical practitioners as they often have greater financial needs due to the hefty cost of medical equipment. The loans could be used to buy initial equipment or acquire other professional practices. Debt consolidation and operational expansions with real estate are also other possible uses for this type of loan. These loans may also include malpractice insurance costs.

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.

• Scalability

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.