Accessing the Private Capital Markets: Cash Flow vs. Asset-Based Borrowing

Many CEOs believe the amount of reasonably priced senior capital their company can obtain is limited by the hard assets that can be pledged as collateral: inventory, receivables, machinery, equipment, etc.

That is simply no longer true.

Over the last two decades, the success and profitability of US businesses have become less dependent on owning hard assets.

Highly skilled people, technology, customer experience, provision of services, and other forces are the predominant factors in a company’s health. Even for asset heavy businesses, the difference between success and failure is usually not their hard assets, but having the people, strategies, processes, systems, and technologies to beat the competition.

Private Capital Market participants have developed a deep and flexible toolkit to provide capital that fuels this evolution in the US economy.

Commercial banks, especially in the lower middle market, tend to be more asset focused. Their basis for lending is having sufficient collateral so their loans will be paid off if the borrower has to be liquidated.

Non-bank lenders and some commercial banks are increasingly “enterprise” vs. asset-based in their investment analyses. For these lenders, EBITDA, “Adjusted EBITDA,” cash-flow available for debt service, and getting comfortable with the quality and consistency of a company’s earnings have replaced the liquidation value of hard assets as the basis for providing capital to clients.

Asset-based lending is still the least expensive, and for smaller companies perhaps the only form of senior capital available. Once a company passes $3 million in EBITDA, private capital market participants want to talk.

Key differences between asset-based and cash flow borrowing include:

  • Cost: cash flow borrowing can have interest rates 2%-4% higher than asset-backed loans
  • Capital Available: commercial banks and asset-backed lenders are usually limited to fixed percentages of available collateral, and top out at 3x EBITDA. Cash flow lenders can go to 4.5x EBITDA on senior debt. This additional capital availability can make a significant difference for companies that have good use for funds.
  • Amortization: Banks will require a minimum of 10% fixed annual amortization, and often more, depending on the terms of a loan. Cash flow lenders can create amortization schedules that are flexible and may be as low as 1%-5% annually. This allows more of your cash flow to be re-invested or used for dividends.

The flexibility available to companies seeking funds from the private capital markets is not a “one size fits all” proposition.

For many companies, a blend of asset-based and cash flow borrowing might create an optimal outcome. For others, very low cost asset-based borrowing might be the right way to go.

If you are the CEO of a healthy company where success and profitability are not based on having more hard assets, and where growth investments (whether for organic growth or external acquisitions), buying out partners or “taking some chips off the table” are smart things to do, cash flow based borrowing may provide more capital at a lower cost than you had thought possible.

This article addresses only the narrow topic of raising senior capital. Information on other funding options available in the private capital markets will be addressed in future articles.

If you have any questions, please reach out to me at


Mark Taffet is CEO of Mast Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies. Information regarding specific aspects of the private capital markets has been provided by SPP Capital Partners, an investment bank focused on raising funds in the private capital markets.