One thing that you always need to keep in mind when it comes to business, whether we’re talking about a mom and pop store or an international conglomerate, is that a business needs borrowed capital. It keeps things fresh and running, it creates flexibility for companies no matter their size or age. Individuals, on the other hand, have far fewer options when it comes to loans and borrowing cash.
Namely, when a business borrows money, it has many more options, making things a bit more complex and difficult. Of course, this is a good thing due to the flexibility it affords you, but it also makes things rather complicated.
A company can borrow cash from a bank or other financial institutions. It can acquire another business, it can engage in major purchases, it can focus on many options and lenders. Then there comes the point where we compare secured and unsecured loans.
Unsecured loans usually have very high-interest rates, and limits to the amount of money you can actually get. On the other hand, secured loans rely on assets you use as collateral in case you can’t meet your obligations and debts.
Why all of this matter?
Understanding the difference between cash flow and asset-based business lending, as well as absorbent the fact that business has many more options for loans than natural persons is vital to get the money you want. Being thorough, having all the information you need at your fingertips, is vital if you want to run a good business.
Australia’s economy isn’t too shabby right now, all things considered, and it might just be the time for you to start thinking about getting your business to a higher level.
What is cash flow lending?
The core part of cash flow lending is that your company is allowed to get cash based on empirical, clear evidence. Namely, in cash flow lending, a financial intuition will give you a loan completely based on your projected cash flows in the near future. Another way of looking at it is borrowing cash from expected revenue, i.e. borrowing from the future.
Now, of course, cash flow lending in Australia isn’t just based on your predicted cash flows. You also have to consider your credit rating, general situation and the state of the lending institution. Institutions, in order to underwrite your loans, will examine any and all expected future company incomes. They will take a look at your credit rating, at your enterprise values.
Now, as far as the uses of cash flow lending are concerned, there are many ways you can put this to the test. Namely, you might need to meet certain payroll obligations so you can pay back some loans, or help out your employees. You basically have money here, now, at your disposal.
Furthermore, these types of loans get processed and pushed out rather quickly. This gives you time to act and to handle a bad situation, or to get your hands on a useful and powerful opportunity.
They are best used by companies that don’t have many hard assets for collateral, while at the same time have rather high balance sheets. Of course, interest rates here are sizable, since these are most of the time unsecured loans.
What is asset-based lending?
Asset-based lending allows you to get some money based on the value of your assets. In order to get this type of loan, you will offer inventory, accounts, receivables, balance sheets, basically any other type of evidence of the items you have at your disposal.
Note that cash flows are indeed part of the analysis lead by the bank when approving these loans, it’s pretty low on the priority list. What they do focus on are physical assets like properties, related estate, land, equipment, vehicles, machinery…
If a borrower is not capable of repaying loans, then the financial institution will simply use an asset of said borrower in order to recoup the lost value of the loan.
These are perfect for companies with lower margins, but large balance sheets with large numbers of assets. Companies such as these might not have huge cash flow potential, making growth and development harder, more tedious, and slower. A financial injection of this type is just what they need to break through a slump.
What makes these an excellent choice is, like any secured loan, they carry low-interest rates. This makes it much easier for later repayments with powerful, but low margin companies. And of course, credit ratings and the general success of the company influence the amount of money the relevant financial institution is willing to give.
Things to keep in mind
As far as asset-based loans are concerned, there are very strict rules when it comes to secured assets. Namely, it’s illegal to secure two loans on the same asset. Furthermore, you can expect both types of loans so-called “due diligence” procedures.
A financial institution might instigate a thorough inspection of your accounting, looking over taxes, legal issues, accounts, and general company history. Keeping your taxes in order, nice and neat, will only bring you good.
As a company owner, you need to take advantage of every asset and benefit you can get your hands on. Understanding the difference between the above two loan types is a great way to add another useful tool to your arsenal.
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