Shifting From Asset-Audit Limits to Cash-Flow Leverage Metrics

Asset based lenders require collateral in the form of receivables or inventory. Despite borrowers having strong cash flow leverage metrics, they are confined to a restrictive relationship where you can only borrow based on physical assets.

These asset-audit limits impede borrowing capacity and only advance a fraction of eligible collateral, undermining liquidity needs of growth companies. When your bank will only advance a fraction of your eligible collateral, you have to chip in additional cash to keep your working capital in equilibrium, let alone have extra capital for growth.

Asset-audit limited companies live in a perpetual state of underfunding and the faster they grow, the greater the likelihood they will hit the wall of illiquidity, where growth in working capital outweighs available free cash flow.

Scaling companies need to borrow based on cash flow leverage metrics. This approach to borrowing users in a new world of capital abundance for scaling companies.

Cash flow leverage metrics include the use a multiple of adjusted EBITDA to establish the size of the loan.

Cash-Flow Leverage Metrics for Scaling Companies

Industry convention cash flow leverage metrics operate along a sliding scale multiple which starts at 3 times and can increase to 5 times.

The cash flow metric lender does not peg their loan to the size of your collateral. They use the chosen multiple times the EBITDA to develop the loan amount, which usually is far larger than a collateral based loan amount.

These lenders also use another cash flow leverage metric, the debt service coverage ratio to make sure the company’s future cash flow can service the loan payments. This is calculated by dividing debt service into free cash flow.

It is usually set at a starting level of 1.25 times, meaning the free cash flow should be 25% higher than the loan payments.

Cash flow leverage metrics always give companies more freedom and flexibility to scale than miserly asset-based structures.

Through starting with a more generous multiple and then extending through a future performance debt service metric, companies can access meaningful amounts of capital that make a huge difference to their ability to unlock growth.