If you want to borrow capital for your business, there are only two types of loans you may receive from the bank or any other lender. It will be either asset-based lending or cash flow lending. Both of these loan structures have a different-criteria for judging the candidates before giving out a loan. It will eventually provide different results if you are applying for both and can result in vast differences in the funding amount that you were hoping to receive.
Small business owners are usually faced with the tough decision of choosing how to fund their operations and growth opportunities that the business gets. Should the business just borrow money and increase their debts or look for investors to get the necessary capital. The fast business cash is the blood of your business, particularly in the initial stage, since your business struggles with liquidity problems if enough cash is not available at critical times. According to the United States Securities and Exchange Commission, businesses must have enough cash to pay their bills and purchase necessary assets.
Cash flow-based loans are based on the trailing and projected values of your cash flow. If your company has a strong cash flow stream, you can get large amounts of loans even if you do not possess a significant quantity of assets. You might not know it but these loans are usually used by high growth and acquisition-based firms who are looking for further expansion or diversifying in further projects. Although cash flow loans can be expensive for the borrower, they play a key role if the business is looking to expand. Here are some advantages of cash flow loans in 2020.
1. Access to large funds:
One of the many advantages of cash flow loans is that this is the perfect opportunity if you want to expand. You will get the funds which were crucial for your business to grow and enter the next stage. Since you will be checked accordingly before being handed out the loan amount such as EBITDA, it means that the lender often agrees to give a huge loan for your business which will have a repayment time stretching to years and give you access to funds which a bank may refuse.
According to various sources, the cash flow problems rose to 60% in 2010 which meant that most businesses were struggling with liquidity issues. However, with these loans being available, you will be in a better position to face the hard times if they come upon you and not run the risk of closing down your business like many other startups.
2. Flexible Terms:
Another advantage of cash flow loans is the repayment period that it offers. These loans are generally designed according to the needs of the borrower with repayment periods usually starting from five years up to seven years. You also have the choice of deferring your yearly payments since there is an option of balloon payment which you can use accordingly.
It will help you to keep the necessary cash flow you require for your business to grow without worrying much about the loan payments. If you possess the necessary cash flow, it will also give you a competitive advantage over your rivals if they are already short of cash since they will likely miss out on the opportunity to grow like you which will ultimately help to move you ahead of its competition and maintain the necessary market share. The flexible terms mean you will never be short of cash and help you to achieve your dream of expanding your business.
3. Less Collateral:
Since they are different from asset-based loans, you usually do not have to put up any collateral to access the loan from the bank. It will help you to make the necessary payments according to your needs and there is nor risk involved with your assets if you miss one of your payments. Instead, you can choose to pay the loan in a balloon amount as mentioned above. You do not have to worry about the annual payments and can direct the funds to meet the requirements of your business. It is also worth remembering that cash flow loans are usually the second lien position compared to asset-based loans and are relatively insecure compared to a conventional bank loan.
Since there are no collaterals involved, you can use the loan to increase the equity valuation of your business and encourage the growth that will result from the valuable financing option that you know have.
4. Scalability:
Cash flow loans are usually linked with the equity value of your business. It can be beneficial for you if you use the loan to increase the growth aspects of your firm. Since these loans help you to achieve your targets, you are likely to receive further financing at negotiable rates to help your business move in the right direction. It will help to slow down the liquidity issues that your firm might face by effectively guaranteeing you the necessary capital that will be required to achieve further growth.
Another benefit you can get is that it will help to cover the gap of slow payments. Businesses often sell their products on credit and if the payments do not come on the time, it hampers your business growth other than causing liquidity problems. So a cash flow loan can help to temporarily solve the issue until you get your payments from your customers.
5. Inexpensive type of equity:
Since cash flow loans generally do not come up with any collateral, the lender cannot influence your company in any way. Although interest rates may be high, it is still a better option than choosing investors who can dilute your share in the company and make changes which you would not have permitted before.
You will be able to keep a hold over your shares and still manage to have total control over the affairs of your firm while also reducing the risk of a take over from other rival firms.
You can use the capital to take the necessary steps which would help your business to be successful in the long run. Since loans are temporary so is your relationship with the lender, which practically ends after you repay the loan. The lender does not have any say in how the business is run at any point in the loan agreement.
Conclusion
It is imperative for any business to maintain healthy cash flow, especially when it is heading north. If you fail to deal with the cash flow issues, you are bound to fail. This is why it is always a sane idea to reach lenders when you fail such a financial crunch.
