Understanding cash flow vs. asset-based business lending

10 Oct 2021

When it comes to applying for and securing finance, business owners have a few different options outside of the standard business loan, which includes options such as cash flow and asset-based lending. We explore both loan options as well as the key differences between them.

Asset based lending

What is cash flow lending?

Cash flow is simply the amount of cash that flows in and out of a business, helping keep the business operating every day. Unlike profit, cash flow is the finance that ebbs and flows through which is why cash flow lending is a great option for bigger businesses with a regular cash flow pattern.

Potential cash flow lenders will review a company’s credit rating and cash flow forecast report before deciding whether to loan them the funds they need. Cash flow-based lending is a great finance option for businesses with a great credit score or solid cash flow.

What is asset-based lending?

Unlike cash flow lending, asset-based lending is a loan based on the value of physical assets a business has and is usually made up of different types of finance like invoice finance with a business loan

This kind of finance is great for businesses with valuable assets such as property, a fleet of vehicles or machinery. The assets owned by the business are used to free up capital and the business can borrow or loan against the value of them instead.

Lenders will work out the terms of the loan too, based on the value of the assets with the terms being more stringent depending on how valuable the asset works out to be.

Understanding the difference between cash flow and asset-based lending

Whilst both loan options are secure and can be a great option for businesses looking to manage their costs efficiently, there are some key differences between them. 

  1. Asset-based lending is only suitable for businesses with physical assets whereas cash flow lending can suit any business with good cash flow.

  2. The next difference between the types of lending is the collateral as asset-based lending is backed up or secured by something tangible. Cash flow lending however is based on a predicted forecast of cash flow making it more of a risk for lenders which impacts businesses when they apply for this kind of funding.

  3. Making repayments is also impacted by the type of lending you choose, for example, if you have an agreement for a monthly repayment for a cash flow loan but cash flow is low that month, you might not be able to cover the payment. If you have an asset-based loan, the repayments are usually based on expected income from the assets, for example, rental income from a property.

Whether you’re considering exploring cash flow lending for your business, or feel your business would benefit more from asset-based lending instead, our team of dedicated Business Finance Specialists are always on hand to help you establish which type of finance would benefit your business most.

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Vivek Seda
Vivek Seda

Asset Lending & Property Team Lead

Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.

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