Differentiate between the Loan and Project Cash Flows?
Definition Definition Net amount of cash that an entity receives and expends over the course of a given period. For a business to continue operating, positive cash flows are required, and they are also necessary to produce value for investors. Investors in particular prefer to see growing cash flows even after capital expenditures have been paid for (which is known as free cash flow).
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Step 1
Loan Cash Flows:
It refers to the borrowing of unsecured nature that is used by small businesses in their daily operations. The loan is used to finance the company’s working capital for example rent, payroll, inventory payments, etc.
These loans are different from those conventional bank loans which require a good credit analysis of the business. But in the case of loan cash flows lender assess the capacity of a company in generating cash flows while the terms of the loan are determined.
These are used by small businesses that lack a credit history or do not have any asset that can be used to back a loan. Therefore, these have higher interest rates so that the lender can offset the repayment risk.
For example,
A bakery with only an oven and refrigerator needs cash to buy inventory like bread. The business does not have any asset to back loan therefore it will look for a person who will lend the bakery the required amount say $15,000. When the company starts generating cash, the loan will be repaid.
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