Cash flow loans are a great way to help manage the overall cash flow of a business. They’re used by companies for a number of reasons, and they can be helpful during a financial time of need.
In this article, you’ll get an informed insight on cash flow loans, what they are and how they can help your business this year.
What Is a Cash Flow Business Loan?
A cash flow loan is an unsecured loan that helps businesses better manage their cash flow. With 1 in 7 small businesses having been left unable to pay employees due to cash flow issues, this type of loan can come in handy.
Cash flow lending is often reliant on the ability of the company to ensure repayment of the loan with expected future cash flows. This can reflect how much the lender or lenders are willing to lend the business.
What are the different types of cash flow business loans?
Revenue Based Financing
This is a relatively new type of loan based around reoccurring revenue. It is especially common with online businesses, although in theory any business that receives regular payments might be able to qualify.
Unsecured business loans
Unsecured loans are financing that you don’t require collateral for. These loans are quick to get, which means a faster cash injection boost for your business.
Merchant cash advance
A merchant cash advance comes in the form of a lump sum payment that you pay back through a pre-agreed percentage of any future debit and credit card transactions. That means your repayments will flow with the business sales you achieve.
Revolving credit facility
A type of business credit line that you have a pre-agreed maximum amount of funds when you require them.
Invoice finance provides up to 95% of the value of an unpaid invoice, which is then paid back once the invoice clears. This can help with business cash flow in the future.
How Can I Get a Cash Flow Business Loan?
Obtaining a cash flow business loan is pretty easy as there are plenty of loan providers out there. In order to apply, you’ll need to do your research to see what lenders are available and which one is the most ideal for your needs.
You’ll need some basic information pertaining to you and your business to see what cash flow lending options are available. This is usually your business name, address, annual turnover, etc.
How soon can I obtain cash flow financing?
Many lenders will have pre-checks to make sure you’re the right fit. Once that’s been confirmed, you apply, and as soon as you receive the quote, you’ll get the money into your account. It could take a matter of days, if not sooner, for some. Cash flow lending is very useful for obtaining funds quickly.
How Do Cash Flow Business Loans Work?
Cash flow lending helps with financing working capital. It helps keep your daily operations maintained instead of being impacted by a lack of funds.
You can use this type of loan to pay things like premise bills, employee wages or hiring equipment. For those businesses that are short on working capital, it’s a handy loan to make use of.
It’s easy enough to qualify, and it can offer the best financial opportunities for short-term lending. This is particularly beneficial for those with a poor credit history.
What Can You Use a Cash Flow Business Loan for?
You can use this loan for any manner of things that fall under the umbrella of daily operations. These include but are not limited to the following:
- Paying rent and bills
- Paying employee wages
- Buying stock
- Recruiting new employees
- Buying business equipment
- Marketing your business
- Renovation or expansion of business.
Types of Businesses That Apply for Cash Flow Loans
Many businesses may benefit from applying for these loans. These could be companies that operate seasonally and therefore need a cash injection to buy supplies and pay staff in the lead up to the opening of the business.
Small businesses and start-ups that are only within their first year or two might require a loan to help tide them over when attempting to secure the bigger clients.
Any business that might need help to better its capital is the perfect client for cash flow lending.
Cash Flow Business Loan Interest Rates and Fees
When it comes to this loan, it all depends on who you’re borrowing from. Some lenders have higher fees and interest rates depending on what type of loan you need and the amount required.
As business cash flow loans aren’t reliant on securing collateral, there are a lot more options out there for most to take advantage of.
Typically you could expect anywhere from 8% up to 15% when taking out a loan from the bank. For loans and financing from online lenders, it could be anywhere between 10% to 100%.
For invoice financing, you can expect between 5% to 60%.
These interest rates and fees can differ, so it’s good to assess every lender you’re looking at, comparing the rates and fees accordingly.
How Do Repayments Work On a Cash Flow Business Loan?
With a cash flow loan, repayments are made once you’ve secured the loan and is often over a short period of one to six months. It’s based on the revenue that the borrower is expected to earn in the near future.
So if it’s a short-term funding solution that you require, then cash flow lending is certainly the right choice to make.
When Is a Cash Flow Business Loan Right for Your Business?
It’s best to use a cash flow business loan when your business finds that it’s short on money. This can happen for small businesses that are growing their client/customer base.
Seasonal businesses where they experience peaks and troughs throughout the year may also benefit from cash flow lending.
Does My Business Qualify for a Cash Flow Financing?
It’s a good idea to assess what your current capital looks like. Are you struggling to make ends meet on a daily, weekly or monthly basis? If it isn’t looking too good, then cash flow loans can help you generate those funds.
It’s always worth getting a second opinion or looking at your options before deciding. Cash flow lending can vary from one lender to the next, so it’s good practice to do your research and to explore what’s available on the market.
The Pros and Cons of Cash Flow Business Loans
As with any loan, there will always be pros and cons to each. Cash flow lending is to be taken seriously and should be assessed upon their benefit to your business specifically. Here are some of the pros and cons that come with these loans.
It’s an unsecured loan – This means that it’s quicker to access, and you don’t need to put any of your property or assets down as collateral for unpaid payments.
It’s a short-term solution – You won’t need to pay off your loan for months or years down the line.
Smooths irregular cash flows – Helps get through slower periods of trading for those that struggle during various times of the year.
Easy to qualify for – Cash flow lenders are more focused on the business performance rather than other loans that consider credit score.
Higher interest – As the loan is unsecured, it does mean that you’ll typically be paying a higher interest rate as a result.
Automatic payments required – Many cash flow lending options will require automatic payments to be made. That can often be difficult if revenue is a little bit all over the place.
If you’re after lower interest rates, then a cash flow loan might not be the right option for you. The same goes for short-term funding solutions, as many businesses may require a longer repayment term.
Is a Personal Guarantee Required to Secure Cash Flow Financing?
To secure cash flow finance, a personal guarantee is required by most, but not all, lenders.
A personal guarantee is a promise that if your business fails to make the repayments as required, you’ll need to make these repayments personally.
This can be a tough pill to swallow if your future revenue predictions don’t come to fruition. As it’s your personal assets too, that can make it more challenging to come back from.
It’s worth bearing this in mind when it comes to taking out cash flow finance. You may find that this personal guarantee is a risk you don’t want to take if you feel the slightest uncertainty about your future revenue.
Can I Get a Cash Flow Business Loan If I Have Bad Credit Rating?
Despite many loans needing a good credit history, a cash flow loan doesn’t require it. It’s not so much about credit history with these cash flow loans but how your business is performing.
If you can show that the business is relatively healthy with significant cash flow potential, then that’s all you need in order to secure the cash flow loan. Of course, it’s always good to have a good credit rating, but in this case, it’s not so important to have the best score possible.
Who Provides Cash Flow Business Loans?
There are plenty of business loan providers for these loans. From banks to independent lenders, any business looking for cash flow finance will likely find it with many lenders that operate on the market currently.
The benefit of the online world is that you’ve got dozens of comparison sites that you can make your way to in order to find the best one for your needs. Alternatively, you can find a private broker who can find you a good deal without you having to lift a finger.
If you’ve been thinking about improving future cash flows, then a business loan like a cash flow loan may be handy for now and in the long run. Do your research before using cash flow lending for your business this year.
Are cash flow loan providers regulated?
Most cash flow loans for businesses are not regulated by the Financial Conduct Authority. But that said, it’s still a good idea to work with lenders that are authorised and regulated as it helps protect both parties when it comes to borrowing money.
Having an unregulated cash flow loan isn’t uncommon, but it can be more dangerous territory to navigate. Especially if you don’t make payments or get charged unexpected fees and interest you didn’t agree to initially.
What are the alternatives to cash flow finance?
A cash flow loan is often considered one of the more traditional types of finance that a business can take out. Some popular alternatives for finance include asset-based lending, equipment financing, grants and angel investors.
It’s worthwhile looking at the different finances available when it comes to cash flow lending.
How long do I need to be trading for to secure cash flow financing?
It often depends on the lenders themselves when it comes to financing. Most lenders are looking for businesses that have been running for at least 18 months.
Some financing lenders may be able to provide a cash flow loan for businesses that have operated a lot less than 18 months. However, they are shorter in supply.
How does a cash flow loan differ from an asset-based loan?
With these loans, the company’s flow is considered within the loan’s underwriting, whereas asset-based loans are based on balance sheet assets.