With so many financing options available to real estate investors, knowing which lending structure is best for your business can be challenging. If you want an alternative to traditional bank lending, consider asset based lending vs cash flow lending. Both offer speed and flexibility to help ensure the success of your next project. 

Read on to learn more about these two types of real estate loans, their key differences, and how you can use them to maximize your investment returns.  

Asset Based Lending Defined

An asset based loan uses your existing assets as lending collateral. In real estate, this is almost always the property being financed. 

Asset based lending is comparable to a residential mortgage: If you default on your home loan, the lender liquidates the property to make themselves whole. The same goes for real estate investors. A lender has a lien on the collateralized property and will seize and sell it in the event of non-payment.

Asset based lending through a private money lender tends to be best when:

• Speed is of the essence, and traditional lending institutions (like banks) can’t match the efficiency or terms of a private money lender.
• You’re an asset-heavy operation with inconsistent cash flows, such as a developer with expansive real estate holdings, and see a “windfall” cash inflow after wrapping up a project (but may be cash flow negative for the months preceding completion).
• You don’t want to deal with personal guarantees. Most asset based loans don’t require personal guarantees and, while your credit score is a factor, it may be less important than the value of the asset itself.

Lastly, asset based loans often have relatively few loan requirements, making them more accessible to small business owners who may lack a W2 or consistent income. 

Cash Flow Lending Defined

Cash flow loans use a property’s historical and projected cash flows as proof of the borrower’s ability to repay the debt. In other words, the company borrows against future revenue (on top of using the property as collateral).

Compared to asset based lending, applying for a cash flow loan can be more rigorous and complex since lenders must verify not just the property’s value but its operational health. Among other things, they’ll assess:

• Basic historical cash flows, including their cyclical consistency and overall predictability
• Earnings before interest, taxes, and depreciation (EBITDA) to shake out non-cash accounting charges that can obscure “true” operational performance and to verify the company’s ability to service debt
• The borrower’s credit score, which reflects how reliably they honor loan agreements

The lender uses this (and additional) data to model risk and the borrower’s ability to repay the debt.  

Overall, cash flow loans are best for larger companies with higher profit margins and a history of recurring, predictable cash flows. They’re also well-suited for companies light on tangible assets but heavy on profit margin. 

Though cash flow loans tend to be short term, expect greater reporting and loan maintenance requirements for the life of the loan. You’ll likely have a minimum set of financial standards to maintain, including liquidity and leverage ratios, and need to keep the same EBITDA that backed the original loan’s underwriting process. 

Cash Flow vs Asset Based Lending

Which is Best? Asset Based Lending vs Cash Flow Lending

Deciding between asset based lending and cash flow lending depends largely on the unique financial structure and needs of your business. Asset based lending is an excellent option for companies that have substantial physical assets, high liquidity, and need quick, flexible financing without stringent credit requirements. In contrast, cash flow lending is ideal for firms with strong, predictable revenue streams but fewer tangible assets.

Ultimately, selecting the right financing solution requires a careful evaluation of your business’s current financial status, growth plans, and risk tolerance. Whether you opt for asset based lending or cash flow lending, the right choice can fuel your company’s growth, improve liquidity, and help you meet your long-term financial goals.

If you have any questions, feel free to contact us or see if you pre-qualify.