For many businesses, borrowing against assets using a traditional high street bank or ABL (Asset Based Lender) simply does not work. However, there is now an alternative in the form of a cashflow loan. A cashflow loan is funding borrowed not on a physical asset but based on the borrower's expected future revenues.
Cashflow lending relies on using a company's EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation). The lender will typically to lend a multiple of the EBITDA figure within a range. The exact multiple will depend on the lender's assessment of the company, the sector in which it trades and wider economic risks. Lenders are usually in the 2 to 3x range, but higher multiples are available.
A higher multiple will depend upon the sustainability of the EBITDA and will require:
Service companies, with little or no assets, can use their future receivables as security in a cashflow loan.
As cashflow loans don't require a lender's appraisal of a physical asset as collateral, cashflow loan applications are generally processed faster than their asset-backed counterpart. Lenders instead take into account a number of factors, including expected revenues, the enterprise value and its credit score.
Cashflow loans tend to be the ideal funding source for Management Buy Out / In and acquisitions whereby leverage against existing assets is usually insufficent to meet a purchase price in full.
Returning to EBITDA, cashflow loan covenants are centred on suitable EBITDA margins. The covenants' main function is to identify the financial risk that an applicant company feasibly assume over the lifetime of the loan without any detrimental impact on the running of its business. The most important covenants are achieving a minimum level of EBITDA and holding a minimum cassh balance (usually 3 months loan repayment as headroom).
Security no longer necessarily involves physical assets!
There are now financing opportunities for businesses for whom it is challenging or impossible to apply for a loan if they can only use physical assets as collateral. Thanks to cashflow lending, SMEs have faster methd of accessing credit, against their future cashflows and profitability as security. While it does require a different assessment approach to risk monitroing covenants and risk assessment, it can provide the right financing solution for asset-light SMEs that are growing and which banks struggle to fund.
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