Cash-Flow Financing

Cash flow financing is a form of financing in which a loan made to a company is backed by a company's expected cash flows. This differs from an asset-backed loan, where the collateral for the loan is based on the company's assets. The schedules or repayments for cash-flow loans are based on the company's projected future cash flows. Cash flow loans can be either short-term or long-term. Debt covenants on these loans are typically focused on adequate levels of EBITDA growth and margins, as well as manageable levels of interest expenses.

Also known as "Cash-Flow Loan."

Cash-flow financing is often used by companies seeking to fund their operations, or acquire another company or other major purchase. Companies are essentially borrowing from cash flows they expect to receive in the future by giving another company the rights to an agreed portion of their receivables. This allows companies to obtain financing today, rather than at some point in the future. Timely operational expenditures, such as meeting payroll requirements, would be one reason for cash-flow financing.

For example, XYZ corporation has hired some additional personnel and needs money to fund the payroll for the new hires. They have a very reliable stream of cash flow that comes in from a couple of their vendors on the 15th of each month, but they need money to make payroll on the 1st. XYZ corporation will use cash flow financing to get a short term loan in the amount needed to cover the payroll expenses on the 1st, then pay it back using the receivables money collected from vendors on the 15th.