In cash flow financing, also known as cash flow loans, a lending institution will base their decisions regarding the size of the loan and the loan repayment schedule on future expected cash flows of the company. The cash flows serve as collateral instead of assets, as in an asset-backed loan.
Such loans might be used to help fund an acquisition or merger, or just to fund operations and payroll costs. Banks will monitor and make certain requirements for the EV/EBITDA (Enterprise Value over Earnings Before Interest Taxes Depreciation and Amortization) and other cash flows of the company.
A company with relatively few assets but significant cash flow will secure this type of loan. A senior stretch loan, also known as an over-advance loan, is a mix between an asset-backed loan and a cash-flow loan.