Asset-Backed Loan vs. Cash Flow Loan
Asset-Backed Loan vs. Cash Flow Loan
An asset-backed loan is secured by collateral like equipment, inventory, or real estate. If you don’t repay, the lender can take the asset.
A cash flow loan, on the other hand, is based on your business’s projected income and profitability. It’s unsecured, which is riskier for lenders and often requires higher interest rates and stricter requirements.
Asset-Backed Loan vs. Cash Flow Loan: Key Differences
When it comes to business lending, understanding the key differences between cash-flow-based loans and asset-based loans can help you choose the right option based on your company’s current financial position and long-term goals.
Cash flow lending is all about forward-looking potential. Lenders who favor this approach care more about your projected earnings and ability to generate revenue in the future. They’re betting on your income streams—how much you’ll make, not what you already have.
That means these loans are typically unsecured and don’t require collateral. But there’s a catch: you’ll need to show solid EBITDA (earnings before interest, taxes, depreciation, and amortization) and a reliable cash flow track record to qualify.
This can be a great fit for businesses with strong income and few hard assets, but only if you have the working capital and margin to support the repayment.
Asset-based lending, on the other hand, is more grounded. It’s a balance-sheet-first approach. Instead of focusing on how much money your company might make, lenders look at what you already own—equipment, inventory, real estate, or receivables—and use those assets as collateral.
If your business has valuable resources but your income statement isn’t as strong, asset-based loans might be easier to secure. These loans provide liquidity based on what can be sold off or collected if things go sideways, so there’s less concern about cash flow performance and more emphasis on asset value.
The metrics each lending option uses are also very different. Cash flow loans use EBITDA to determine whether you have the cash capacity to repay without defaulting, while asset-based lenders focus on current assets and overall liquidity.
Short on time? Watch a quick explainer video instead 👇
FAQs
Is Asset-Based Lending Better Than Cash Flow-Based Lending?
It depends on your business situation. Asset-based lending suits businesses with valuable physical assets but inconsistent cash flow. Cash flow-based lending is ideal if your business has strong earnings and wants to borrow without putting up collateral.
So, one isn’t better than the other—it just comes down to what you can offer and what you need.
What is the interest rate on asset-backed loans?
Interest rates on asset-based loans typically range from 5% to 15%, depending on the lender, your credit profile, and the quality of the collateral. Because assets secure the loan, the rates are often lower than unsecured loans, but not always. Riskier assets or borrowers with poor credit can still face higher rates.
What are the disadvantages of asset-based lending?
The big downside? You’re putting your assets on the line. If you default, the lender can seize them. Also, lenders may require frequent appraisals, audits, or monitoring, which adds to administrative work and costs. And if the value of your collateral drops, your borrowing limit might shrink, too.
What is the difference between asset-backed lending and direct lending?
Asset-backed lending is secured with collateral, such as equipment or inventory. On the other hand, direct lending often refers to loans made directly by non-bank lenders (like private equity firms) that may or may not be secured.
The key difference is that asset-backed loans are all about the security behind the loan, while direct lending focuses on the source of the loan itself.
What is the difference between asset-backed loans and mortgages?
Both are secured loans, but the main difference is what backs them. A mortgage is specifically backed by real estate, usually a home or commercial property. Asset-backed loans, however, can be secured by a broader range of assets, like receivables, inventory, or equipment. Mortgages are a type of asset-backed loan, just a more specialized version.
