Let’s be honest – figuring out how to finance your business can feel overwhelming. These days, you’ve got more options than ever, but that doesn’t necessarily make the decision easier. Two of the most popular senior debt options you’ll come across are asset-based lending (ABL) and cash flow loans. They’re both solid choices, but they work very differently depending on what your business looks like and where you’re headed. Here’s the thing: you might not even have to choose between them. Sometimes the best approach is using both.

Asset-Based Lending: Turn Your Stuff Into Cash

Think of asset-based lending as borrowing against what you already own. Your lender looks at your tangible assets – things like accounts receivable, inventory, equipment, and sometimes even real estate – and says, “We’ll lend you money based on the value of these things.”

This type of financing is perfect if you’ve got a lot of assets but your cash flow isn’t exactly consistent. Maybe you’re in a turnaround situation, or you are buying equipment and inventory to support future growth that hasn’t materialized just yet, or you’re in an industry where profits can be unpredictable. The beauty of ABL is that your borrowing capacity moves with your assets. More inventory? More borrowing power.

ABL works great if you’re:

• Running a business that ties up a lot of cash in working capital (think manufacturing, distribution, wholesale, or staffing companies)
• Going through a rough patch where your EBITDA isn’t stellar, but you’ve got solid assets to back you up
• Growing rapidly and needing to invest in inventory or equipment that hasn’t started generating cash yet
• Looking for flexibility without a bunch of financial covenants breathing down your neck

ABL usually comes with a higher advance rate (the amount you can borrow against), equipment, receivables, and inventory, and fewer covenants. However, the interest rates are often higher than cash flow loans.

Cash Flow Loans: Bet on Your Earning Power

Cash flow loans are the opposite approach. Instead of looking at what you own, lenders focus on what you earn. They’ll dig into your historical EBITDA, project your future earnings, and typically offer you a loan that’s a multiple of that EBITDA.

This is all about proving you can generate the cash to pay them back. Sometimes they’ll also consider your overall enterprise value to give you a bit more borrowing room.

Cash flow loans make sense if you’re:

• Running a business with predictable, recurring revenue and healthy profit margins (like SaaS companies, healthcare businesses, or professional services
• Asset-light but valuable – maybe you don’t own much equipment, but your business is worth a lot
• Looking to fund growth, acquisitions, or a recapitalization

Just know that cash flow loans come with more strings attached. You’ll likely face tighter covenants around things like leverage ratios and interest coverage, plus more detailed financial reporting requirements.

Why Not Both?

Here’s where it gets interesting. Many middle-market companies are finding that combining both approaches gives them the best of both worlds.

Picture this: You’re a growing company that needs working capital to handle day-to-day operations, but you also want to expand or make some acquisitions. You could use ABL to cover your working capital needs and layer on a cash flow term loan for your growth plans.

Or maybe you’re a private equity portfolio company that wants to maximize leverage while keeping plenty of liquidity available. A hybrid structure lets you do exactly that.

This blended approach means you’re not putting all your eggs in one basket. You can tap into both your asset efficiency and your earnings power while staying flexible as market conditions change.

How Do You Decide?

Look, there’s no one-size-fits-all answer here, but there are some key questions you should ask yourself:

• What does your asset base look like, and how liquid are those assets?
• How predictable is your cash flow? Can you count on it month after month?
• Are you in growth mode, or are you more focused on stability?
• How comfortable are you with financial covenants and detailed reporting?
• Do you know what debt level your business can support?
• How would increases or decreases in your sales revenue impact your covenants or ability to pay your lender and/or vendors?
• Are you trying to avoid giving up equity?

At the end of the day, the right financing structure should make your life easier, not harder. It should support what you’re trying to accomplish operationally, give you room to maneuver, and help build long-term value.

Don’t just go with the simplest option – go with the smartest one for your specific situation.

Businesses can benefit from a well-designed debt structure to support their current operations and future growth. We can help evaluate the best option for your business. At DWH, we’re here for you. Feel free to reach out for a conversation on how we can assist you as you focus on thriving.

This post was written by Heather Gardner
hgardner@dwhcorp.com | LinkedIn

All companies experience change.
Plan for it with us.