- Greater Flexibility: Asset-based loans generally require fewer covenants than cash-flow loans since loans are closely tied to collateral value. This flexibility frees management to focus on executing the operating plan rather than worrying about meeting monthly or quarterly covenants.
- Enhanced Liquidity: If a company borrows against a multiple of EBITDA and its earnings decline, its borrowing capacity is diminished. Borrowing against assets may result in greater liquidity and more predictable availability.
- Patient Capital: Because asset-based loans are closely tied to the collateral, asset-based lenders can give borrowers more time to work through a market fluctuation or turnaround in the event of financial difficulty than cash-flow lenders. Chief financial officers sometimes prefer asset-based loans over a cash-flow structure to assure funding in the event of a business or economic downturn.
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