Cash flow financing, or subordinate debt (sub-debt) financing, can be available to businesses that create steady, predictable earnings and potential growth. Until earnings are established borrowing capacity is restricted to how much you leverage business and personal assets through financing facilities like accounts receivable factoring, equipment sale and lease back arrangements, and mortgages, to name a few.
As a business grows and solidifies its sales and receivables collection process, it develops arguably the most important components from a financing and valuation perspective – cash flow.
While all lenders want to see strong cash flow to solidify debt repayment and reduce the risk of borrower default, many primary lenders in the senior or first security position will still not provide enough debt for small and midsized companies.
Here’s where cash flow financing comes into play. Like any other type of lender, cash flow financing sources have their own specialized business models that focus on things like the age of business, and the type of business and industry.
Viewed to be a higher risk loan due to a lack of hard security, cash flow financing can vary tremendously from lender to lender and business to business.