Loan vs. Credit
Annual fee loan vs. bullet mortgage loan – the differences.
Cash flow lending vs. Whether it’s a start-up or a 200-year-old conglomerate like EI, asset-based loans
By definition, this means that a group draws money from the expected sales, which it expects to receive in the future. In this form of credit, credit ratings are much more important than historical cash flows. For example, a company focused on fulfilling its wage obligations could pay out its employees with cash flow funding and repay the loan and any earnings and earnings interest of its employees at a later date.
No material security features such as real estate or investments are necessary for these loans. Rather, these lenders assess the expected future corporate earnings, credit rating and value of the business. This has the disadvantage that a company has a financing option much faster, because it does not have to assess the security. Institutions distinguish cash flow-based loans by determining their credit rating.
As a rule, they will issue the operating result (EBITDA) of a group (earnings before interest, taxes and depreciation) together with a credit multiplier to determine this indicator. With this form of financing, lenders can incorporate the risk potential resulting from industry and economic cycles. In times of economic downturn, many companies will lose their earnings, while the risk multiplier used by the National Bank will ease.
By combining these two declining values, the available capacity for a company is reduced.
Cash flow loans are better suited for companies that have good margins in their balance sheets or that offer insufficient security as collateral. These characteristics include service providers, distribution companies and producers of low-margin products. The interest on these loans is usually higher than that of the other due to lack of collateral security that the lender can claim in the event of default.
Asset-based lending consists of corporate loans backed by the realization value of their assets. The beneficiary receives this form of financing by investing inventories, accounts receivable and / or other balance sheet assets as collateral. Although cash flows (especially those related to physical assets) are taken into account when granting this loan, they are a minor determinant.
General assets that serve as collateral for an investment loan include tangible assets such as land and buildings, company inventory and production facilities, or real raw materials. If the borrower does not repay the loan or the defaults, the credit bank may realize the collateral and sell the receivables to recover its loan amount.
These are also companies that need equity capital for their operations and further economic growth, especially in industries that may not have significant cash flow potential. With an asset-based loan, a medium-sized company can obtain the necessary equity to combat the lack of rapid growth. According to the authors William Bygrave and Andrew Zacharakis, creditworthy companies could account for only 60% to 75% of this nominal value.
However, if physical inventory or manufacturing facilities are provided as possible collateral, the loan amount may be less than 50% of the true. Value of the assets. This is because these investments can be sold by liquidation or auction and the lender may need to sell these assets quickly to get his loan back.
Asset-based loans are subject to very strict rules regarding the collateral status of the material goods used for lending. In particular, no company or individual may make such assets available to other lenders as a form or security. If these assets are ceded to another lender, they must postpone their position for the acquisition of the assets.
Finally, the borrowing company has to deal with all accounting, tax or legal matters before concluding an agreement. The lender has the opportunity to collateralise and sell the asset being liquidated. Before a loan is approved, lenders must conduct a relatively lengthy due diligence process, reviewing the balance sheets, accounting records and assets to calculate the value of a company’s eligible credit.
The cost of this study varies, but the usual expenses include site visits, collateral valuations and interest expenses.