Cash Flow Lending vs. Asset Lending

Author: Gina Hall | October 14, 2016

Is Cash Flow Lending Right For You?

It’s true. You need to have money to make money. But what if you don’t. You still need to make money. That’s where cash flow lending or sometimes asset lending may be a good short term financing option for a small business?

But First, what is the difference between cash flow lending and asset lending? Cash flow lending lets you borrow money based on projected future cash flow. Asset-based lending allows you to borrow on the liquidation value of assets on your balance sheet.

Which is the best fit for your company? Here are the details to help you make a decision.

Cash Flow Lending

Trying to make payroll? Need to cover expenses related to purchasing, marketing, or distribution? A cash flow lending solution might be what you’re looking for. The loan is backed by your personal or business cash flow and you borrow based on future revenue. Credit ratings are important in this type of lending, in addition to an established history of cash flow. Lenders will use EBITDA (earnings before interest, taxes, depreciation, and amortization) in conjunction with a credit multiplier to calculate the loan amount.

The upside? Loans based on cash flow don’t require property or assets as collateral. You obtain the funds quicker since appraisals aren’t needed. Cash flow lenders also operate in a highly regulated environment.

Try setting up an account with Fundbox to get the cash to meet your immediate needs, whether it be covering payroll or an urgent equipment repair. While not quite cash flow lending—it’s invoice financing—Fundbox advances the full value of your invoice and doesn’t interfere with customer relationships. With Fundbox, funds are available in your bank account the next day and can cover expenses while you wait on invoices to come in.

Asset Lending

Need a loan to grow an established business? Then asset-based lending is an option. Asset-based lending allows a business to secure a secured loan based on the liquidation value of things like inventory, accounts receivable, or balance-sheet assets. Other assets used as collateral include real estate and manufacturing equipment. Pending your company’s credit rating, you could borrow anywhere from 75 percent to 90 percent of the face value of your accounts receivable line on your balance sheet. This is typically is offered as a revolving line of credit.

But beware—if you don’t repay the loan, the lender can seize the collateral to recoup costs.

Other drawbacks? Asset-based loans have tough rules to determine what can be used as collateral to get a loan. Assets cannot be used as collateral in any other loan, and the borrower must be clear of accounting, tax, or legal issues. As a result, asset lending can take longer because of due diligence. A lender will pore over the borrower’s balance sheet, ledgers, and other assets to assess the value of the company. The borrower also often has to pay for site visits and collateral evaluations on top of interest.

When is asset-based lending a good idea? Generally, it’s for borrowers with weak credit ratings and low cash flow, or for those with major accounts receivables on their balance sheets.

Those are the basics, so compare and decide if either is a good fit for your business.

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