Cash Flow vs Asset-Based Lending: Which is Right for You?
Both cash flow lending and asset-based lending have their place in fulfilling business borrowing needs. Each can be appropriate in different situations.
Cash flow lending
Loans are backed by the anticipated cash flows of the business, or in some cases the personal cash flow of the owner — business credit rating is also a major factor.
When is cash flow lending appropriate?
Cash flow lending can be appropriate for companies with no physical collateral, such as service organizations. It can offer a faster approval process -- no appraisals of physical assets are required.
When may you want to consider asset-based lending
ABLs are secured by specific company assets such as accounts receivable, inventories or equipment. Its applicable to a variety of industries, including freight movers, manufacturers, fleet buyers and auto dealers.
If you have a larger balance sheet but lower profitability level, you may want to consider ABL.
It can also be a good fit for capital-intensive industries and businesses with inconsistent cash flow.
ABL can help preserve cash resources, as it's often a lower cost of capital.