A Comparative Analysis of Asset-Based and Cash Flow-Based Loans

When a company gets an asset-based loan (ABL), it is putting its assets at risk. An ABL uses a company's assets as collateral. These loans are much more expensive than regular bank loans. However, they are a boon for companies that don't have a huge cash flow.   

Let’s say there is a business owner trying to get a loan. He has got more than one option. He can, for example, get a loan on the basis of his company's cash flow. If his company makes huge profits, this is the only option he needs to consider. Banks prefer this kind of lending because cash flow based loans are less risky.

What if his company doesn't make huge profits? He may still require funding. In that case, his only option is to obtain an ABL. Traditional banks don't prefer this kind of loans. Most of them don't even offer these loans. However, there are several lenders who make asset-based loans.

An ABL is based on the value of the assets. That means if a company has assets of substantial value, getting an ABL is relatively easier. The lender might still consider your cash flow, but it comes only second.

Collateral

Different lenders accept different kinds of assets as collateral, but they all insist that the assets have to be salable. Lenders will not accept assets that cannot be sold quickly. The assets that are typically accepted by lenders include equipment, machinery, real estate, accounts receivable and inventory.

When the borrower gets the loan, it gives the lender the first security interest in the collateralized assets. So if the borrower fails to make the payments, the lender can seize the collateral, sell it and recover its investment. When a borrower gets a cash flow-based loan, they don't have to offer collateral. These loans are based on the company's credit rating and expected income.

Suitability

ABLs are suitable for some businesses. In the same way, cash-flow based loans are suitable for some other companies. ABLs are usually obtained by companies that don't have a good credit rating or surplus cash flow. However, its assets should be of substantial value. Otherwise, the lender will not approve the loan.

If the company has a sizable amount of cash flow and a decent credit rating, it should consider getting a regular bank loan which carries lower interest rates.

Assessment

Both kinds of loans have their advantages and disadvantages and it is hard to say whether one kind of loan is better than the other. It depends on the credit requirements and financial situations of the borrower.

It is true that asset-based loans are more expensive because they carry a higher risk. On the other hand, they help small businesses get financing even if they don't have sufficient income to justify the amount of cash they need.

ABLs have higher interest rates and processing fees. The borrowers should be able to use the loan amount to make profits. They can, for example, use the money to buy more machinery and increase their productivity. They may also use the loan amount to make acquisitions. If they fail to use it profitably, getting an asset-based loan would be a mistake.

Struggling to find buyers that qualify? RealTAG gives you the real estate content that drives consumers to your site, and gives you an inside look at their financial situation. Close more real estate deals and generate qualified leads by contacting RealTAG today!