Both types of lending can be fast options for growing businesses, but they have different eligibility requirements and risks. Each option can help small businesses secure funding when traditional loans are unavailable.
Cash flow-based lending is evaluated based on the business’s ability to generate cash flow using projected earnings and business performance, while asset-based lending hinges on the value of collateral like receivables, inventory, equipment, or real estate. Asset-based lending involves a due diligence process that may include inspections of financial statements and appraisals.
Cash flow lenders analyze metrics such as EBITDA and future cash flow projections, making it easier for companies with strong margins and minimal physical assets to qualify. Businesses must generate sufficient revenue to repay these loans. For this reason, lenders scrutinize a company’s ability to create consistent revenue streams more carefully.
In contrast, asset-based lenders focus less on earnings and more on the liquidity and value of balance sheet assets. This means asset-rich businesses with uneven or inconsistent cash flow find asset-based loans more accessible. Asset-based structures also tend to include fewer restrictive financial covenants compared to the tight coverage and leverage ratios required in cash-flow lending. Lenders require physical collateral for this option.
When it comes to cost and flexibility, asset-based loans generally offer lower interest rates since the lender has collateral protection, and borrowing capacity often expands as asset value increases. Cash flow financing, by contrast, usually involves higher rates and fee structures, but can provide quicker funds and simpler approvals, especially for businesses without assets to pledge. The availability of asset-based credit fluctuates with asset performance, whereas cash flow loans can be more volatile if earnings weaken.
Asset-Based Lending vs. Cash Flow Financing Compared
| Feature | Cash Flow Financing | Asset-Based Lending |
|---|---|---|
| Collateral Requirement | No physical collateral required; based on earnings and cash flow | Requires tangible assets (AR, inventory, equipment, real estate) as collateral |
| Qualification Metrics | EBITDA, enterprise value, projected revenue | Asset liquidity and value, advance rates based on collateral |
| Approval & Originating Time | Faster, minimal documentation | Slower due diligence process with appraisals and field exams |
| Interest Rates | Typically higher due to higher risk | Lower interest rates, since secured by assets |
| Covenant Structure | Stricter financial covenants tied to cash flow and leverage ratios | Less restrictive covenants; often revolving lines tied to asset performance |
| Borrowing Capacity | Based on future earnings, they may fluctuate | Based on a borrowing base tied to asset value, it can grow with asset accumulation |
How to apply for Cash Flow Financing or Asset-Based Lending:
You can apply for a cash flow or asset-based small business loan through our lender network. Follow these steps to apply:
Step 1: Consider Your Needs
Before you begin the application process, take some time to make sure this is the right product for your individual needs. Will you be able to use the capital for your desired purpose? Is the repayment structure conducive to your cash flow? Do you know exactly how much funding to request?
Answering these questions ahead of time will make the rest of this process much smoother.
Step 2: Gather Your Documents
Documentation requirements vary depending on the cash flow loan you’re requesting. For example, invoice financing will require your Accounts Receivable (A/R) and Accounts Payable (A/P) aging reports. A merchant cash advance requires bank statements showing card payments.
Regardless of the loan, expect to provide these basic documents during the application:
- Driver’s license
- Voided business check
- Bank statements from the past three months
- Financial statements
Step 3: Fill Out the Application
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to supply the information from the previous section along with your desired loan amount.
Step 4: Speak to a Representative
Once you apply, a representative will contact you to explain the repayment terms, interest rates, and terms you qualify for. This will ensure that there are no surprises or hidden fees during repayment.
Step 5: Receive Approval
If approved, funds should appear in your bank account in 1-3 business days, depending on your loan type.
Frequently Asked Questions
Here are some of the most common questions about cash flow loans versus asset-based lending.
Is a Cash Flow Loan or an Asset-Based Loan best for my business?
Choosing the right financial strategy between ABL and cash flow loans comes down to your business’s strengths and weaknesses. Each financing method has pros and cons.
Cash flow loans are better for companies with robust revenue streams and projected cash flow growth. Your cash flow must be able to handle the loan repayments without eating into your margins. Service-based companies and technology firms often favor cash flow lending with strong revenue but limited physical assets.
Asset-based loans tend to be more suitable for businesses with a solid historical performance and a robust balance sheet to show for it. In particular, if your company has acquired assets with high liquidity, ABL could be more beneficial.
Companies with large balance sheets are often better suited for asset-based lending than those with high EBITDA margins. Asset-based loans are typically structured as revolving lines of credit. Capital-intensive industries usually benefit from ABL.
Is it easier to qualify for Cash Flow Lenders?
Both cash flow loans and asset-based lending provide alternatives to conventional loans, which are primarily based on the business owner’s personal credit score, time in business, and overall revenue. Businesses with substantial, verifiable cash flow will find qualifying for cash flow loans easier. Companies with limited cash flow but high-value assets will find it easier to be eligible for ABL loans.
Are Cash Flow or Asset-Based Loans better for bad credit?
Both loan types are available as bad credit business loans. However, when seeking business loans with no credit, you want to show lenders how you can mitigate their risks.
Strong cash flow can certainly help, but one of the best ways to offset bad credit is by pledging collateral. For this reason, asset-based lending is better for bad credit, but only if you have the collateral to pledge.
Cash Flow Financing vs. Asset-Based Lending – Final Thoughts
Thanks to online lenders, small business owners have more financing options than ever before. However, knowing the key differences between loan structures can help you choose the best option and avoid loans that could strain your cash flow.
One way to view ABL and cash flow loans is through the lens of how lenders perceive you and your business. ABL lenders consider your business’s performance and the overall equity of your company – the asset you can pledge as collateral. Cash flow lenders also look at what you’ve done, but with an eye towards your future and your cash flow – your company’s ability to earn money is the asset.
Consider cash flow loans if you’re confident in your company’s future and don’t want to risk your assets. ABL might be better if your cash flow is shaky, but you have substantial business assets.
Contact us if you have any questions or want to apply for a small business loan. Our loan executives can help you find the best financing option for your business needs.
