Every business needs access to finance at some point. Whether it’s raising working capital to cover cash flow gaps or seeking finance to fund growth plans, borrowing capital is integral to most business plans. It’s how some of the world’s biggest companies got to where they are today.

When you look to borrow capital from a lender, you’ll encounter two main types of business lending: Cash Flow or Asset-Based.

Cash flow lending enables a business to borrow money based on their projected future revenues – the cash flows into the business.

Asset-based lending allows a business to use its assets as collateral to raise capital.

There are advantages to both types of lending that make them more suitable for different kinds of businesses. To help you decide which is better for you, let’s go over how each form of lending works and take a look at the available funding options.

Cash flow-based lending allows a business to use its projected cash flows to access funding. In simple terms, the company uses its future revenue to borrow money now.

For example, a business looking to expand and take on new staff could use cash flow-based lending to cover the costs of recruiting new employees. With the new team members on board, the business can pay back the money borrowed and any interest using the additional revenue generated.

Cash flow lending doesn’t require the business to provide any assets or property as collateral for the loan. The lender will analyse your projected earnings, historical performance, and credit rating to determine how much you can borrow.

Asset-Based Lending

Asset-based lending enables a business to use its assets as collateral to access funding. This can involve physical assets like machinery, property, inventory, and equipment, but also money owed to the business in the form of unpaid sales invoices.

For example, a manufacturer can use its existing machinery to raise capital to purchase new equipment. With the new equipment installed, the business can increase the number of products it can manufacture and use the additional revenue to pay back the sum owed.

Asset-based lending is a great way to free up the capital tied up in business assets. Because the funding is secured with collateral, this type of business finance is more accessible for companies that have a short trading history or low credit score.

Asset-based Lending Options

Invoice Finance

Invoice Finance is a flexible form of asset-based lending for businesses that offer extended payment terms to their customers. Instead of waiting for your customers to pay, you can use your outstanding invoices to access an immediate cash injection.

There are two main types of invoice finance: factoring and discounting.

Invoice factoring enables you to immediately access up to 95% of the value of unpaid invoices. The lender will handle the collections and payments, so you can focus on growing your business rather than accounts management. Because the factor manages collections, your customers will be aware of your relationship with the financing company.

Invoice discounting also allows you to access up to 85% of your unpaid invoices immediately. Once the customer pays the invoice, you will receive the remaining 15% less factoring fees. With invoice discounting, you will be responsible for the collections and payment of the invoices, and in most cases your relationship with the factoring company will remain confidential.

Equipment Finance

Equipment finance is an asset-based lending solution that enables businesses to finance the purchase of new and second-hand equipment.

Large one-off expenses can significantly impact cash flow. With Equipment Finance, you can get the equipment you need to grow your business, and make smaller regular repayments. This is a good option for growing businesses that need to increase their capabilities and productivity to capitalise on new opportunities.

Asset Finance

Asset finance allows you to unlock the capital tied up in physical assets. If you have high-value assets on your balance sheet, you can use those assets to access an immediate cash injection to cover cash flow gaps or fuel your growth plans.

This form of finance is suitable for any business that has capital tied up in machinery, equipment, vehicles, etc. For some retailers and wholesalers, it may be possible to use a percentage of inventory to secure finance.

You may have capital tied up in hidden assets you never realized could be a potential source of finance.

Is Asset-Based Lending Right for Your Business?

Any business with significant assets on its balance sheet can use asset-based lending to raise capital. Both physical assets and receivables can be used as collateral to borrow.

Asset-based lending options are typically much easier and faster to access than cash flow-based alternatives. Because the credit is secured against collateral, the lender knows they will be able to recoup the sum owed if the borrower defaults. That means businesses with low credit scores can qualify for asset-based funding, and the rates of interest are typically lower than cash flow lending options.

For companies that lack significant assets or mainly process cash transactions, a cash flow-based lending solution may provide a better business finance option.

ScotPac Business Finance

We offer a wide range of funding solutions to help all kinds of businesses access the capital they need to grow. If you need some help deciding if cash flow or asset-based finance is better suited to your business, contact us today to speak to one of our friendly expert advisers.