The kind of financing/lending which is based on the cash flows of company/firm/proprietor is referred as cash flow based lending. Cash flow is the amount of money coming in and out from the organization. Basis the strength of cash flows when a financier takes call for financing any organization/project we call it cash flow financing. The loan against collateral can be deviated to different activities leading to defaults from customers. Whereas cash flow lending will help make lending money safe and reduce defaults, since the lending is based on cash flows coming in and out where end use monitoring is easy, hence reducing defaults and NPAs as well.

Lets take an example of any agribusiness entity:

A Miller needs funds for procurement of Wheat and Maize from markets/farmers/FPOs. He has capacity to mill 50,000 Kg of grain every day. Agriculture being seasonal affair hence he will procure the grains during short interval for mill to operate year long. The amount of grains converted into flour and sold to end buyer will create cash flows for the miller. When miller pledge these cashflows to a financing institute to avail working capital, this will be referred as Cash Flow based Lending

CFL is best suited for MSMEs, young and nascent companies as their cash flow is good with smaller assets and machinery. Lesser assets leading to limited working capitals creates bottlenecks for SMEs to grow, but CFL can help in obtaining funds based on the past and stipulated future cash flows. One of the cash flow based financing is receivable financing, will discuss more in detail about agri-receivable financing in next post.