Both asset based finance and cash flow finance are important sources of funding for a business for its short term(working capital) and long term(capital assets) sustainability.
Asset-based finance is a source of funding that is secured by a company’s assets.
This article looks at what is asset based finance and see the difference between the more traditional source of finance namely cash flow loan or finance.
Asset based finance:Accounts Receivables,Inventory,etc
Some features of asset-based finance include:
- Lender generally has the right to seize the borrower’s asset(s) in the event that the commitments under the loan agreement is unfulfilled;
- Normally referring to the financing by a borrower’s account receivable through factoring or invoice discounting facilities;
- However it also includes many more assets like inventory,equipment,plant and machinery,real estates,etc which can also be used to arrange asset-based loans on a revolving or term basis;
- Often used when traditional bank financing and other forms of raising finance are difficult to find or expensive. The most common forms of asset-based finance are asset-based loans,factoring and invoice discounting.
Compared to asset-based finance:
Cash flow-based loan is the more traditional one where the lender merely imposes covenants and linking the availability and volume of credit lines to specific earnings and liquidity levels and other metrics relating to the financial results of the borrower.
Cash Flows based finance:PROFIT/EARNINGS?
Below tabulated some of the major differences between Asset-based finance and Cash Flow Finance/ loan:
| Asset-based Loan | Cash Flow-based Loan | |
| 1. | An asset based loan is normally structured as a revolving line of credit and secured by tangible short-term(or current) assets such as accounts receivable and inventory. | |
| 2. | Borrowers can even raise additional funds or stretch or over-advance loan by using intangible assets like patents,intellectual property or trade names as collateral. | |
| 3. | Asset based loan mainly rely on the quality and value of the borrower’s assets | For Cash flow-based loan,depend largely on its earnings/cash flows |
| 4. | Lesser number of restrictive financial covenants linking the availability of funds to the borrower’s financial performance. | Many more number of restrictive financial covenants linking the availability of funds to the borrower’s financial performance. |
| 5 | Asset-based loan affected by asset value rather than operational performance hence increase market valuation,etc can helps to increase the volume of credit from lender | Compared to Asset-based,in a cash flow loan,companies often borrow against a multiple of their earnings. Any downwards earnings can results in lesser funds from lender. |
| 6. | Asset-based loan can be more flexible as they are linked to asset value of the collateral. Companies are less affected by quarterly results and less restricted in terms of the availability ad the use of borrowed funds. | |
| 7 | Asset-based loan is usually the last option for Treasurer to deploy. The traditional cash flow loan usually come first as the mindset is “ the company is doing well,why should we charge our assets to the lenders…. |
FCCA,CA(MIA)with more than 26 years of post-qualifying working experiences. Previous working stints with one of the big accounting four,Regional GFC & Group Treasurer in a group of Malaysian and Group CFO in Singapore public listed concern.Also author to another very popular free educational accounting cum finance blog:http://basiccollegeaccounting.com under the branding of College Accounting Coach.
Recent Comments