Cash Flow Funding v. Asset Based Loan: Which Is Best For Your Small Business?
Written by moxysupport on July 19, 2015
If you’re running a successful small business, you’re intimately familiar with the ebb and flow of liquid assets, otherwise known as cash flow. If your cash flow is low at the time an amazing growth opportunity presents itself, you may not have the means to take advantage. Now it’s time to think about raising capital or borrowing money. Fortunately, you have several options.
If you don’t want to put your business in the hands of investors or venture capitalists, you could be considering one of two choices: an asset-based loan or cash flow funding.
Let’s define these two methods of acquiring cash, so you can determine which is best for your business.
What is an Asset Based Loan?
If you go to your local bank or credit union and fill out a loan application, you might be lucky enough to get a small business loan. Lenders will evaluate your assets and collateral, your past credit history (both yours and your company’s), and your business plan. Lenders want to see a strong growth strategy, consistent cash flow, and enough assets to cover the loan in case you don’t pay.
When you take out a small business loan, you could be putting your business and all its assets, as well as your own home and other property, at risk if something goes wrong and you can’t pay back the loan.
Additionally, small business loans are increasingly harder to get today, in the wake of the mortgage crisis. Banks are simply more conservative about lending money.
What is Cash Flow Funding?
Instead of borrowing money against your assets, cash flow funding takes advantage of your company’s accounts receivables, so that you can secure the cash you need for opportunities today, before those invoices are paid.
Rather than putting your business or personal assets up as collateral, your invoices with payment terms are your collateral.
Is a Business Loan the Right Answer?
Most conventional lenders won’t even accept loan applications from businesses with less than a three-to-five-year history. If your business shows a long history of perfect credit, has an optimistic outlook based on your business plan, and if you don’t mind incurring debt and putting your personal and business assets at stake, a business loan could give you the capital you need to grow.
Can Cash Flow Funding Help You?
If you need money today to take advantage of a business opportunity, such as an investment or an acquisition, and if borrowing against those invoices won’t hurt your future balance sheets, cash flow funding could provide the perfect short-term solution.
Rather than paying interest, you’ll just pay a fee on the money borrowed. Because you’re selling your invoices to the funding company, you’re also reducing the burden on your accounting staff. You won’t have to collect unpaid invoices, keep track of terms, or wonder if providing a specific vendor Net-60 terms is a smart business decision. The factoring company manages your invoices and you’ll have tomorrow’s money today, so you can get through periods of rapid growth, acquisitions, or investments without stress or a strain on your budget.