What Are the Benefits of Cash Flow Lending?

Posted on: May 2nd, 2017

cash flow lending There are two primary lending approaches available in the financial markets today: cash flow-based lending or asset-based lending. These loan structures employ vastly different qualifying formulae which results in vastly different funding amounts for the borrower.

Asset-based loans are based on the liquidation value of assets on the balance sheet. If you do not have much in the way of assets, the loan amount is rather meager.

On the other hand, cash flow-based loans are based on trailing and projected future cash flows. If you are a company with strong cash flow and low asset intensity, this structure can provide a large quantum of funding.

This is often used by high growth or acquisition-oriented companies that are seeking to expand and diversify. While cash flow lending is less secure for the lender, and more expensive for the borrower, it often has a transformative effect on business growth, leading to a step change factor of expansion.

There are many benefits of Cash-Flow Lending:

Larger funding amount – Cash flow loans are based on a multiple of trailing EBITDA, not an advance rate against assets. This often means that the company qualifies for a much larger loan- in some cases, up to 5 times the amount a bank will give you.
Longer, flexible terms – cash flow loans are customized to the needs of the borrower and generally have a term of 5 to 7 years. Repayment is usually backended through a balloon payment. This allows you to defer the loan payments off and use cash flow to grow the business.
Comfortable with less collateral – Cash flow loans are usually are in a second lien position or are unsecured relative to a conventional bank loan. They will lend deeper into the equity valuation of the business, giving you a valuable financing to spur growth. Often there is no need for a personal guaranty.
Scalability – cash flow loans are tied to the equity value or enterprise value of your business. Because they believe in your equity value, they are more apt to provide more funding for future growth.
Inexpensive Form of Equity – cash flow loans do not get shares in the company but get higher interest rates. It is more advantageous to bring in a cash flow lender than to bring in an investor. You will hold on to your shares and also maintain your control of the business.

Mezzanine finance is a good option for businesses seeking cash-flow loans

Mezzanine loans are cash flow friendly. They require no collateral, and are offered based on the company’s EBITDA level. Mezzanine financing is a great option for small and medium sized businesses seeking acquisition financing, growth capital financing, recapitalization financing or refinancing.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.