There are a lot of debt financing options. Asset-based versus cash flow-based financing is one way to break down the solution landscape. By understanding the differences between these two types of financing, companies can increase their awareness of what’s available and make more informed capital decisions.
Same Question, Different Expectations
“How likely am I to get my money back?” is the fundamental question lenders evaluate before loaning your company money. Asset-based and cash flow-based lenders have different expectations for how they’ll be repaid and what they look to for comfort (collateral).
Asset-based lenders expect to be repaid from your company turning assets into cash (e.g., collecting on receivables, selling inventory, etc.) – or in a worst-case scenario, seizing and liquidating the assets.
Cash flow-based lenders expect to be repaid from your company’s future profits – or in a worst-case scenario, proceeds from a forced sale of the business.
Asset-Based vs. Cash Flow-Based Loans
What borrowed money is used for is relevant. There is often a linkage between what is being financed and how the lender looks at potential repayment.
Calculating Borrowing Capacity
How much money your company can borrow is based on the lender’s source of repayment / collateral.
Both lender groups establish what they could collect in a worst-case liquidation or forced sale and determine a comfortable loan-to-collateral value (LTV) ratio.