Asset Based vs Cash Flow Lending: All You Need to Know

Learning the difference between asset based lending vs. cash flow lending is important for business owners looking to raise credit to finance their current operations and fund expansion. 

The fact that these two loan options are so common is a testament to the fact that business lending today must be diverse enough to cater for the unique financing situations of a range of businesses, be they large or small. 

Nevertheless, many business owners don’t understand what these lending options exactly are, or, more importantly, how to decide which one is the better option for their situation. 

In this article, we will introduce these two lending options and explore the key factors to consider before deciding on one against the other.

We will cover:

  1. Asset based vs cash flow lending: A definition
  2. Key differences
  3. Pros and cons
  4. How to get the financing you need

Now let's jump in.

Do you need a personalized lending solution that is appropriate for your business? At Duckfund, we make sure we learn as much as possible about our clients to provide the loan option most suitable for their industry and business plan. Loan applications take less than one minute to fill out, and funding lands on your account in just 24 hours. Register and apply for a loan, and we’ll help you understand the best way to move forward.

1. Asset based vs cash flow lending: A definition

What is asset-based lending?

Simply put, asset-based lending is a form of credit where the lender secures a loan based on the balance sheet of assets of a company. This can include real estate, machinery or inventory assets.

In other words, when you opt for asset-based lending, your business’s assets serve as the collateral upon which the lender secures the loan. Since your assets are the collateral, the lender has a lien on them; that is, they can sell those assets to repay the loan in the case of a default.

With asset-based lending, the possible loan amount depends on the liquidation value of your assets (how much they can be sold for in the case of default). The greater the liquidation value of your assets, the greater the possible loan amount.

However, lenders will not give you the total liquidation value of the asset(s) you have chosen as collateral. The actual loan amount will often be a percentage of the possible loan amount. What percentage the lender chooses will depend on your credit quality, which is often based on your credit rating.

With a good rating, you can typically get a loan worth between 75% and 90% of the value of your total assets.

What is cash flow lending?

Cash flow lending is a form of credit where the lender secures your loan based on your past, present, and future cash flow. This is the amount of money that goes in and out of the business within a defined period.

Instead of focusing on the liquidation value of your non-cash assets, cash flow lenders focus on how well your business has generated (based on past reports), generates (based on current reports), and will generate cash (based on future cash flow projections).

Cash flow lenders also consider your credit ratings. As a measure of your credit quality, your credit rating will often ultimately determine the final loan amount.

Typically, cash flow lenders will multiply your EBITDA (earnings before interest, tax, depreciation and amortization), also known as operating income, with a credit multiplier based on your credit rating in order to determine how much the loan will be.

2. Asset based vs cash flow lending: Key differences

So far we have seen that asset-based lending focuses on a business’s assets as collateral while cash flow lending concentrates on the business’s past, present, and future cash flow.

Now, let’s take a step forward in our analysis of asset based lending vs cash flow lending by considering a few significant differences that will impact how you choose your loan.

The role of cash flow

Not to make things confusing, but asset-based lenders also consider cash flow.

However, cash flow is only secondary as the liquidation value of your assets takes center stage. Cash flow will still impact decisions of how well you can service the loan, but if your assets are valuable enough, the lender could still decide to proceed even with a less-than-stellar cash flow (since they can sell your assets in the case of a default).

On the other hand, cash flow is the primary concern for cash flow lenders since they don’t have a lien on any of your tangible assets (or inventories or accounts receivables, for that matter).

If your cash flow is poor, a cash flow lender might decide against lending you money.

The role of credit rating

Similarly, credit rating is more important in cash flow lending compared to asset-based lending.

While the former will consider it as a key factor in deciding whether to lend you money or not, the latter will primarily consider it in determining what portion of the possible loan amount they should lend you.

Nevertheless, some lenders will still require a minimum FICO score of 500 before granting a loan.

Due diligence process

Cash flow lending tends to have a less complicated due diligence process.

The lender only needs to check your past and present cash flow and make future cash flow projections based on them.

However, asset-based lenders need to be sure that you own the assets in question and that they have not overestimated the liquidation value. This will sometimes include auditing the accounting of your assets and identifying any issues in relation to ownership.

Consequently, cash flow lending may be faster to acquire than asset-based lending.

Typical use

Businesses typically use cash flow lending for operational and working capital needs, such as purchasing inventories, paying rent or administrative expenses, settling invoices with suppliers, among other needs.

Therefore, these types of loans are often for smaller amounts and shorter terms. This is a critical piece of financing knowledge that small business owners in particular should understand.

On the other hand, depending on the value of the company’s assets, asset-based loans tend to be used for more business growth-oriented expenses. That is, they are often for larger amounts and longer terms, compared to cash flow loans.


Cash flow lending is more suitable for companies with low tangible assets but large (and regular) cash flows, a good credit rating, and high margins (that is, the difference between revenue and cost of revenue).

Small companies that work in the service industry (marketing firms, financial advisors, etc.) are good examples of businesses that often benefit from cash flow lending, as well as small-scale producers that are located far down the supply chain.

Meanwhile, asset-based lending is usually seen as more suitable for companies with large balance sheets even if they have low consistent cash flow, lower margins, and less-than-stellar credit rating. Larger manufacturing companies in various industries are good examples.

Based on the above, you should now be able to begin to grasp which of the two is more suitable for your particular business. But there is still more to consider before you should make a final decision.

3. Asset based vs cash flow lending: Pros and cons

To further help you make your lending decision, let’s take one more step in our asset lending vs cash flow lending discussion by considering the pros and cons of each option.

Pros of asset-based lending

  • Lower interest rate: Generally, asset-based lending, because of the lien on your assets, has a lower interest rate. Interest rates reflect the risk the lender believes it is taking up by lending you money. With collateral that can be sold, that risk is reduced, so the interest rate given is lower.
  • Credit rating is not as important: As said above, credit rating is not as important in deciding whether this type of lender decides to give you money. It might only affect the percentage of the liquidation amount of your assets.

Cons of asset-based lending

  • Extended due diligence period: To be sure of the ownership and value of your assets, the lender might take more time conducting due diligence.
  • Loss of assets: In the case of default, you can lose your company’s assets.

Pros of cash flow lending

  • Value of balance sheet assets is not as important: With good and consistent cash flow and a good credit rating, you can qualify for a cash flow loan even if you don’t have large assets on your balance sheet.
  • Faster and more straightforward: The due diligence process is typically straightforward, which means you can get the loan faster with less hoops to jump through.

Cons of cash flow lending

  • Requires good credit rating: A good credit rating is more important with cash flow lending than it is with asset-based lending. A poor credit rating may mean higher interest rates or no loan at all.
  • More expensive: An interest rate for these loans is typically higher than asset-based loans. Also, fees for securing the loan and penalties for defaults are often on the high side.
  • Can become more complicated: For additional security, some cash flow lenders may place a lien on your entire business or require the owner to make personal guarantees for those loans. These requirements can put a greater strain on your business and make things much more complicated.

4. Asset based vs cash flow lending: Getting the financing your business needs

As we have discussed, asset-based lending is suitable for companies with large balance sheets and low or inconsistent cash flow (relative to the loan amount needed), while cash flow lending is often seen as more suitable for companies with consistent and growing cash flow but low assets.

To make a choice, you’ll need to truly understand the financial health of your business before considering which loans would be the most appropriate.

At Duckfund, we go beyond the asset-based and cash flow lending discussion to deeply understand your business and give you the financing option that is most appropriate for your needs. Instead of a generic loan offer, we deal with each company on a case-by-case basis.

How do we do this?

We work with the software companies you use for marketing, sales, accounting, invoicing, CRM, among others, to unearth important information about your business.

With this information, we gain a better understanding of your business and a deeper visibility into your flow of capital. Consequently, we can discover its true potential beyond a surface consideration of credit rating or even assets and cash flow.

Our unique AI-based scoring model takes all this information into consideration and we make a lending offer (term loan or trade finance) best suited to help your business. Once you accept this loan offer, we make cash available within 24 hours.

Due to our commitment to look beyond the surface and explore the real potential of your business, we have a higher approval rate and we give consideration to SMBs who have often been overlooked in business financing.

Even if you are a small business who supplies raw material to the big brands through a long supply chain, we’ll uncover this connection, evaluate what it tells us about your business, and provide you the finance you need for your small or mid-sized business, no matter how deep you are in your industry.

Do you want a personalized lending solution that caters to the real needs of your business? Register and apply for a loan in less than one minute.
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