Strategic Financing: When to Use Asset-Based Lending, Cash Flow Loans, or Both

In today’s capital markets, companies have more financing options than ever, but choosing the right structure is critical. Two of the most common forms of senior debt - asset-based lending (ABL) and cash flow loans - offer distinct advantages depending on a company’s financial profile, growth stage, and strategic objectives. For many businesses, the optimal solution may even be a combination of both.

Asset-Based Lending: Unlocking Liquidity from the Balance Sheet

Asset-based lending is a form of secured credit where the borrowing base is tied to the value of a company’s tangible assets, typically A/R, inventory, equipment and sometimes real estate. ABL is particularly attractive for companies that are asset-rich and may or may not have positive cash flow. Advance rates are applied to eligible assets, and borrowing capacity is adjusted with asset performance over time.

Best suited for:

• Companies with high working capital intensity (e.g., manufacturers, distributors, wholesalers, staffing companies, etc.).
• Businesses in turnaround or transitional phases, where EBITDA may be inconsistent but asset coverage is strong.
• Firms seeking flexible liquidity with fewer financial covenants.

Cash Flow Loans: Leveraging Earnings Power

Cash flow loans are underwritten based on a company’s historical and projected EBITDA, with debt capacity typically expressed as a multiple of EBITDA. These loans rely on the borrower’s ability to generate future cash flows for repayment. Enterprise value of the company will also be considered in some situations to create additional loan availability.

Best suited for:

• Companies with predictable, recurring revenue and strong EBITDA margins (e.g., SaaS, healthcare, business services).
• Firms with limited tangible assets but high enterprise value.
• Businesses pursuing growth capital, M&A, or recapitalizations.

Cash flow loans often come with tighter covenants, such as leverage and interest coverage ratios, and require financial forecasting and reporting. They are common in sponsor-backed transactions and among companies with strong credit profiles.

When a Hybrid Approach Makes Sense

Many companies, especially in the middle market, benefit from a blended capital structure that includes both ABL and cash flow components. For example:

• A growth-stage company might use ABL to fund working capital and a cash flow term loan to finance expansion or acquisitions.
• A private equity-backed portfolio company may layer a cash flow loan atop an ABL facility to optimize leverage while preserving liquidity.

This hybrid approach allows businesses to align financing with both asset efficiency and earnings power, while maintaining flexibility across economic cycles.

Strategic Considerations

The choice between ABL and cash flow lending should be guided by strategy, not simplicity. Key factors to evaluate include:

• Asset composition and liquidity
• Cash flow stability and predictability
• Stage of growth and capital intensity
• Covenant tolerance and reporting capabilities
• Equity dilution considerations

Ultimately, the right financing structure should support operational needs, preserve optionality, and enhance enterprise value over time.