Cash Flow Based Lending For Banks And SMEs Make More Sense

Cash Flow Based Lending For Banks And SMEs Make More Sense
Kelly Wilson

Glopinion by

Kelly Wilson

Nov 11, 2019

Cash flow-based lending in the new thing in the finance industry that makes a lot of sense for the banks and SMEs to follow. This helps a lot in the businesses to flourish as this principle is primarily based on the predictable income from the business.

Cash flow-based lending in the new thing in the finance industry that makes a lot of sense for the banks and SMEs to follow. This helps a lot in the businesses to flourish as this principle is primarily based on the predictable income from the business.
If you are a small business owner, you will face challenges in growing your business that is many and diverse.
• These issues and challenges are faced by the small business owners on a continuous basis so much so that it can sometimes hamper the very core of their functionality and operation.
• Adding to their woes are the complications and inaccessibility in obtaining capital that they require to operate and run their business as well as evolve as a sustainable business.
Unfortunately, most of the small business owners are not aware of the fact that there is a lot of promise when it comes to lending money to the small business market. The primary reason behind this is that the SMEs characteristically do not have any fixed holdings that the lenders and the banks can use as collateral for the loan.
This is the basic reason that cash flow-based borrowing makes more sense and is the ideal approach for the traditional banks and even the online alternative money lending sources such as and others to follow when it comes to lending to the SMEs which in fact forms the vast majority of the business sector all over the world. Even the SMEs to prefer cash flow-based loans over asset-based loans in order to run their business and expand it.
The plan of action
If you consider the economy of a nation, the SMEs play a vital role in its growth. This because:
• They help in generating more employment
• They also play a significant role in contributing to the overall output.
It is therefore important for them to go for such a form of lending that will help them to anticipate the expected income from their business.
On the other hand, when you consider from the perspective of the banks, cash flow-based lending seems to be the most potent rationale that will help them to transform their lending into profitability that they can gain from the loan investments made on the SMEs.

However, this is not a smooth and easy task that can be done as it is. There is a need to change the existing traditional mindset of collateral-based lending methods to the SMEs. For this, it is imperative that the banks should understand the SME segment as well as the ways in which they operate their businesses.
On the other hand, the small business enterprise is also required to present a few things when applying to avail such funding such as:
• Its credit rating
• The documented cash flow as well as
• Their business plans.
This will help the banks to determine their borrowing capacity. However, this is exactly where small businesses struggle and falter. Many times it is seen that the small businesses are not able to present them or their business profile in a better way in any of the following aspects:
• Through their loan applications
• Their organized and audited balanced statements or
• Their long-term business plans.
This is because they are not able to provide the required data that will support their fund applications and the most significant of all reasons is that they shy away from the asset-based loans.
Most banks are therefore now considering opting for cash flow-based lending to SMEs as they have realized that this is perhaps the best opportunity for them to build a long and strong relationship with the SMEs.
The financial technologies
The lenders will also have to adopt and adapt different technological advancements when cash flow lending is widely accepted. In addition to that they must also:
• Assess the potential of the SMEs in meeting the loan obligations and requirements to be eligible to avail such loans
• Train their staff to make such assessments and know what are the relevant data that must be collected to create a more dependable financial statement.
When the banks embrace newer technologies as they are at the forefront of embracing these technologies, they can create better banking models that will offer better options to the small business sector.
Therefore, the banks have to instruct and assign their staff to collaborate with the small businesses that will help them to evaluate the ability of the small businesses to repay the loan along with the interest most reasonably.
This will need the banks to follow a strategic step and use a lot of new technologies such as:
• Calling for on-site visits to the businesses
• Understanding how these businesses function
• Conversing with the small business owners and
• Receiving substantiation and other proofs.
All these will help the banks to evaluate the capability of the small businesses to generate capital.
The cash-based loans actually provide the small businesses with the much-required capital that will ease their funding needs for performing various functions and operations of the business such as:
• To advertise and market their business, brands, goods or services
• This will also help them in turn to improve their inventory
• To increase their workspace and
• To hire more experienced staff.
In the proper use of the fund for performing these functions, it will help the small businesses to gain that competitive edge that will, in turn, help them to boost the growth of their business. They will also be able to generate more revenue for their business with their ventures that will help them to repay the loan on time and with interest that will reinforce their cash flow position.
Therefore, when all these that are said are done, it is only the cash that will help the small businesses to pay back a mortgage and it can also be said that the significance of cash flow is very high a small business. It is momentous and actually acts as the lifeblood for the business helping it to survive and sustain the fierce competition in the small business world.


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