Business owners in need of capital may opt for different types of lending. The cash flow and asset-based models are popular alternatives to conventional business loans, but they have limitations. Here is how these options compare and what types of companies they suit best.
Defining Cash Flow Lending
In layman’s terms, all the money that flows in and out of a company constitutes its cash flow. It supports the day-to-day functioning of the business. Unlike profit, this amount can fluctuate from month to month. This model of lending is particularly attractive for major businesses whose cash flow is steady.
Owners of companies with unsteady financials should think twice before getting these loans. Such businesses may fail to make their monthly payments. On the other hand, they may benefit from options like crypto lending. Check this Salt lending comparison for more information.
When lenders consider applications, they examine the credit rating of the company and its cash flow forecast. If your organization boasts an excellent credit score and a stable flow of funds, this form of lending is perfectly suitable. Relying on the cash flow requires an optimistic forecast, so your eligibility depends on these predictions.
These loan models are based on tangible (physical) assets. Businesses can borrow capital based on the value of the assets in their possession. The arrangements include different types of financing, such as invoice finance that goes with a business loan.
To be eligible for such loans, your company needs to have valuable tangibles, such as machinery, property, or vehicle fleet. You can use them to free up capital and borrow against their value. The higher it is, the less stringent the terms of your agreement.
- Both types of business lending allow companies to manage their costs better, but they have different strengths and limitations.
- Cash flow lending requires a stable flow of capital through the company. The accessibility of asset-based loans depends on the value of physical assets.
- The two models also require different types of collateral. In the first case, the loan is provided based on a forecast, which means it is riskier for lenders. As a result, getting this type of funding is more difficult. Financial institutions are more willing to provide funding backed by something physical, such as vehicles or property.
- The differences also affect the repayments. Suppose you got a cash flow loan with monthly installments, but your cash flow this month plunges. This means that your company is unable to cover the payment using its typical sources of revenue. In the case of tangible assets, repayments are usually linked to the expected income they bring, such as rental payments.
Each form of lending has pros and cons depending on the size and profitability of your business. If the cash flow is steady, you can use positive forecast reports instead of tangible collateral. If your company possesses valuable assets, it can secure capital more easily.