Flow and inventory financing operations have different risk profiles that reflect the main difference between structures: cash flows are asset purchase agreements and inventory financing operations are asset-backed arrangements. Cash flow agreements provide a convenient way to obtain funds for start-up mortgages. The right partnership between the initiator and the lender can allow an initiator to use the lender`s balance sheet to launch or increase their mortgages, while the lender can use the initiator`s existing credit platform to quickly deploy funds in different markets and asset classes. The backer in a forward flow generally finances 100 per cent of loans that meet the eligibility criteria and does not require the initiator to commit his own resources or to include a junior financier. The prospect of stimulating creation without own resources should be attractive to new initiators and their shareholders. As a general rule, funds are sent to the initiator as often as per week or fourteen days and can be sized according to the author`s pipeline, which means that they can track the author`s growth rate and possible seasonal fluctuations. The author is “pre-financed” with the amounts needed to complete his pipeline, often with an additional buffer to smooth out unexpected changes. Once a loan is taken out, which can be granted daily, it is sold and transferred to the lender and the corresponding guarantee is assigned to which the loan is recorded on the lender`s balance sheet. A significant similarity between the types of transactions is (unsurprisingly) the focus on the underlying assets – including how mortgage credit is negotiated, signed, originated, maintained and how they work.
A cash flow agreement is an agreement in which a lender offers to purchase credits from all or part of the sponsor. Often, the lender`s ability to use the initiator either through the requirement of a buyback or by a right to breach the guarantee is limited in the case of a cash flow transaction. For example, the author`s liability may be subject to time and monetary constraints and cannot cover legislative changes and certain other risks. After the sale of credits to the funder, the initiator will want to minimize future potential receivables or liabilities, particularly given its limited economic performance. The terms of a cash flow agreement allow the buyer to acquire a declared amount of debt from a lender at an agreed price for the duration of the contract. Typical cash flow agreements last three to twelve months, but may be longer. For example, a lender may agree to sell $10 million per month of debt at 15 per cent of face value for one year. The price is determined according to the amount of the buyer`s debt that will be likely to recover. The buyer benefits by ensuring a predictable debt.
The lender receives unproductive debts from its books and converts the receivables owed into a constant stream of income. In addition, lenders are reducing costs by eliminating unsuccessful collective efforts. From a lender`s perspective, the accounting nature of forward flow may mean that it is more appropriate for non-banks to carry out part of their balance sheet without the same regulatory capital effects as for bankers.