Cash-flow Loans – No Assets? No Problem?

Matthew Lawrence looks at a rapidly growing type of finance for asset light businesses

50 years ago, most businesses could not borrow without hard asset security, usually in the form of land and buildings or hard assets such as vehicles with established second- hand values. The 70’s and 80’s saw the growth of factoring and invoice discounting, but there was little else in the way of new finance for smaller businesses until the 2008 banking crisis, when “alternative” lenders emerged.

These alternative lenders didn’t just “fill the gap” left by the banks, they brought new types of loans and advances or made specialised loans, previously only available to big corporates, available to a wider market. Cash-flow lending has been a very large part of this.

A cash-flow loan is made to a company on the basis, of its expected cash flows. At lower levels and over shorter terms cash-flow loans are often unsecured and only backed by personal guarantees. Larger and longer-term loans are most commonly secured by a debenture over the company rather than fully secured by property. In both cases personal guarantees are preferred, but they are by no means always required for a business with a solid earnings history and prospects.

Cash-flow loans are particularly appropriate if a business is retail, doesn’t make credit sales, or if invoice finance is inappropriate due to the nature of sales or the credit period offered. Available short and long term, they are frequently cheaper and easier to administer than invoice finance.

Common reasons for taking out cash-flow loans include:

Business Development

  • Investing in people
  • Investing in product
  • Investing in marketing

Business Purchase

  • Growth through acquisition
  • MBO (management buy-out)
  • MBI (management buy-in)

Shareholder Exit

  • Succession Planning
  • Retirement
  • Dispute resolution

As rule this sort of debt finance is more expensive than lending backed by property security, but this is not always the case. We have recently witnessed the refinance of a small optician’s chain that had no assets it could use a s security but raised finance at 2.5% over base rate. Whilst in the same month a furniture manufacturer had to pay 6% over base for a normal commercial mortgage on their factory.

Costs are case by case! and banks are not necessarily cheaper than alternative lenders!