Cash flow lending refers to a type of lending where a borrower’s ability to repay a loan is based on their projected cash flow rather than the value of assets or collateral. This type of lending is often used by small and medium-sized businesses that may not have significant assets to use as collateral.
Here are some key things to know about cash flow lending:
How it works: Cash flow lending is typically based on the borrower’s cash flow projections, which are used to determine their ability to repay the loan. The lender will typically look at the borrower’s financial statements, including their income statement, balance sheet, and cash flow statement, to assess their cash flow and creditworthiness.
Advantages: Cash flow lending can be advantageous for borrowers who may not have significant assets to use as collateral. It can also be a faster and more streamlined lending process, as it may not require as much documentation or collateral as traditional lending.
Disadvantages: Cash flow lending can come with higher interest rates and fees compared to traditional lending, as it may be perceived as riskier due to the lack of collateral. Additionally, borrowers may need to provide more detailed financial information and projections to secure this type of loan.
Uses: Cash flow lending can be used for a variety of purposes, such as funding working capital, acquiring new equipment or inventory, or financing expansion plans.
Types of lenders: Cash flow lending can be provided by a variety of lenders, including banks, credit unions, and alternative lenders. Alternative lenders, such as online lenders or peer-to-peer lending platforms, may be more flexible and have different requirements compared to traditional lenders.
Overall, cash flow lending can be a useful option for businesses that may not have significant assets to use as collateral but have strong cash flow projections. However, borrowers should be aware of the potential drawbacks and ensure they can comfortably repay the loan before agreeing to any terms.