To make money, you’ll need to have money. But what if you don’t? Well, you should still be making money – this is where asset-based or cash flow lending might be a decent short-term financing option for a small business.
But what’s the difference between asset-based and cash flow lending? Asset-based lending enables you to borrow on the assets’ liquidation value on your balance sheet. Whereas, depending on projected future cash flow, cash flow lending lets you borrow money.
Let’s discuss 4 key differences between cash flow and asset-based lending in Kansas City, MO:
There’s no one-size-fits-all solution for business loans. For example, lenders consider the credit rating of the company first before deciding on whether they qualify for funding or not. In simple words, if your business has an excellent credit rating and a stable cash flow, going for cash flow-based loans will make more sense. However, if you wish to qualify for an asset-based loan, the assets of borrowers should be considered sufficient enough for the lender to label the risk as acceptable.
An asset-based loan can be a perfect funding option for small businesses that have a hard time generating enough cash flow in the short term. However, there’s one disadvantage of an asset-based loan: it can cost you more than a loan based on cash flow. This can be because asset-based loans typically come with higher interest rates and more expensive fees.
3. Lender’s focus
A lender’s focus when considering a cash-flow loan or an asset-based loan is quite different. For example, a conventional bank loan is primarily based on the cash flow of a business. However, in asset-based loans, the assets of the company are the main focus, followed by cash flow.
4. Loan collateral
Asset-based lenders focus on the kinds of collateral that a borrower can guarantee and look at the different assets of a borrower. The asset lenders consider certain essentials in an asset-based loan application, which are income obtained from real estate, customer invoices, inventory, and equipment.
The borrower is also obliged to deem the company of the lender as the party who has rights of collateral and seizure over the assets if the borrower defaults on their payment obligations. There’s no requirement of collateral in cash flow loans. However, they depend on the credit rating and income of the company.
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