Here are the pros and cons
Whatever your business sector and whatever your track record, your company will almost certainly need to borrow at one time or another. The big question is whether you should opt for asset-based or cash flow lending.
So, what are the advantages and drawbacks of each?
All about cash flow lending
Put simply, cash flow lending is borrowing against anticipated cash flows. So tomorrow’s income and margins will make the loan repayments. No physical collateral is required for the loan, with lenders instead looking at your income and cash flow to date, and of course your business plan and future prospects.
There are two major advantages to cash flow lending: decision-making tends to be relatively fast, which is a huge bonus if you need the money urgently; and if you have a growing, profitable business you may be able to borrow large amounts.
However, your business credit score will play a huge part in determining whether you are accepted for this type of credit.
If your score is compromised or not fully developed, you are unlikely to be accepted and may have to look at other sources of finance. Finally, since this type of loan is unsecured, it can attract much higher interest rates than asset-based loans.
What you need to know about asset-based lending
In contrast, asset-based lending is secured on a specific piece of collateral.
This could be property, plant or equipment. Anything valuable that your business owns outright. With invoice factoring and discounting, you can even borrow against the value of your invoices, as soon as you issue them.
At Cashsolv, we’ll lend up to 85% of the total. Repayment is then made when your customers pay you.
Before an asset-based loan is approved, there will need to be due diligence, including a detailed valuation of the asset to be used as security. In particular, lenders will want to be certain that the asset has not been pledged as security for another loan, and that you have fully met your tax obligations.
The reason for this is that an unpaid tax debt could see the asset seized by HMRC, meaning that the lender is not repaid and cannot seize the asset in lieu.
As a result, the lender may well wish to study your balance sheet and accounts to ensure that you are in a sustainable position and that you are unlikely to default to any preferred creditors.
This can make asset-based lending a much slower process, meaning it is unsuitable if you need cash quickly.
Of course, there are two huge advantages. One is that the interest rate will be much lower, since it is a secured loan. The second is that your credit rating will be much less important. So long as you’re not likely to go into liquidation whilst owing large sums to HMRC or other preferred creditors, the lender isn’t going to be too bothered if you’ve had a few payment problems in the past.
Don’t forget to talk to Cashsolv
Whichever type of loan best suits your needs, Cashsolv is here to help.
We’re the specialists in small business finance, and we’ll give the funds you need to get ahead. To learn more about what we can do for you, speak to one of our experts.