Corporate Finance
Working Capital
Growth Capital
Recapitalization
Refinancing
Debt Financing
Equity Financing
Debt Financing
Cash Flow Financing
A cash flow facility is a loan advanced against the cash flow of a business and is typically used to generate cash for operations or to support acquisitions or growth. A lender’s primary focus is to evaluate if the business generates sufficient cash flow to repay its debt. Loan approval and the amount of the loan typically are based on three aspects:
- Historical cash flow;
- Projected cash flow; and
- Adequate debt to cash flow ratios.
Typically, the loan amount is based on a percentage of a weighted average of historical and projected cash flow (each lender calculates the percentage differently), with the loan not exceeding a specified debt coverage ratio. Debt coverage is typically the company’s cash flow (or EBITDA) divided by the current portion of total debt plus projected annual interest expense.
A cash flow loan is structured with an increasing principle payment amortization schedule based on the company’s projected cash flow. If the company doesn’t achieve its projected EBITDA, realize anticipated operating efficiencies, or manage capital expenditures as stated upon signing the loan, cash flows may be inadequate to service its debt and default of covenants can occur.
Advantages
Cash flow loans are advantageous for companies that are not “asset-rich” but do have high levels of historical and projected cash flow, such as professional and business service companies. In most cases, they also do not require that the company’s assets be used to secure, or collateralize the debt.
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