Expert Knowledge on Cash Flow Lends by Industry Professionals

Expert Knowledge on Cash Flow Lends by Industry Professionals

ADS’s guide for cash flow lends refers to when unsecured business loans are made to larger companies that have reliable and stable cash-flows.

Three Key Steps in Securing Cash Flow Lends

Step 1:

When conducting cash flow lends, after an initial due diligence period, the borrower is provided with an indicative offer of finance from the private lender which is used mainly for discussion purposes to see if the pricing and terms are generally agreeable with the borrower.

Step 2:

The private lender commences further due diligence usually requiring the borrower to pay for some upfront costs of their due diligence including for third party reports (accounting and financial due diligence). The cost of due diligence for cash flow lending tends to be greater than other finance options. This is because there are no hard asset collateral for the lender if the borrower defaults for any reason. The alternative lender is therefore more interested into understanding the sustainability of the business and the strength of the management team operating the company.

Step 3:

Once due diligence has occurred, formal loan documents are ordered by the lender if the borrower has paid the legal costs and other associated fees.

 

What to Watch out for in Cash Flow Lends:

1. Debt-equity structures

Quite often cash flow lending pushes the boundaries between debt and equity as private lenders seek to accommodate the borrower by structuring a debt and equity instrument. Careful consideration must be placed on what the terms of the equity are, what rights will the instrument have in the borrowers business and what influence the lender will have in the daily operations of the business.

2. Time to settlement

Cash flow lends can be much more complicated than asset-backed loans as the lender must do much more due diligence than other types of finance. The end result on loan approvals can be more subjective and lender specific. It is important that the borrower has sufficient time available to them to accommodate a lengthy due diligence period.

3. Seeking personal assets as collateral

Often private lenders will ask director’s to provide personal guarantee on the loan. Where the private lender moves beyond this , is to ask for secured interests in the director’s personal assets such as their home or other properties. This moves the borrowers position from a riskier cashflow lend to a less riskier property deal – the loan terms and pricing should be adjusted to reflect the additional collateral provided.

Other Areas of Interest

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