For both small and large businesses, there can be times where unexpected expenses arise.
Cash flow loans allow businesses to cover any shortfall that may arise, such as assisting you to take care of wages, investing in new equipment, or investing in a new business venture that won’t put your budget under strain.
These loans have a range of benefits and keeping on top of your finances can be the difference between a successful business and a struggling business.
How does a cash flow loan work?
Ideal for small and start-up businesses, cash flow loans provide immediate financial support to businesses that are temporarily underfunded but will be receiving funds soon.
It is a great financing alternative if you’re not qualified for a secured business loan because of a lack of, insufficient, or poor credit score, no established record of profitability and no significant assets to back the loan.
Having security against your loan means linking it with an asset - such as a property – which the lender will sell if you’re unable to service the repayments.
Unlike other traditional asset-based loans, cash flow loans don’t require any type of physical collateral.
Many cash-flow loans use your projected sales revenue to secure immediate funding.
Debtor finance
Also known as invoice finance, debtor financing is a way for businesses to turn their unpaid or outstanding customer invoices into a source of readily available funding.
It uses a business’s accounts receivable ledger as collateral and allows you to draw up to 80 per cent of the balance of your outstanding invoices.
Once these invoices are settled, the balance is repaid, minus any fees incurred.
With debtor financing, you use the money you’re owed to free up working capital.
This way, you don’t need to stress about extra debt or ongoing bank commitments.
Debtor finance is a beneficial option for those businesses that have late-paying customers on payment terms of 30 to 90 days.
Trade finance
If cash flow loans aren’t quite the right fit for your situation, trade finance could be better suited.
Trade finance provides you with fast funding for stock, inventory, and raw materials so you don’t have to turn away new orders.
This type of financing works well as it allows you to use a revolving line of credit to pay both overseas and local suppliers in any currency when you need to.
How will your business’s cash flow loan be assessed?
Like a home loan, your business cash flow loan will be assessed against a specific criterion.
Although lenders take into consideration your credit score, they’re often much more focused on your cash flow and the cash flow generation capacity of the business.
The capacity of your business is based on a few factors, including:
Bank statements and/or credit card processing transactions
Frequency and volume of transactions
Seasonal sales
Expenses
Returning customer revenue
Customer reviews
As it often is with an unsecured loan, the cash flow loan attracts higher interest rates.
This compensates for the high risk of loan default.
Depending on your lender, you might repay the loan in anywhere from six months to a year and a half.
Pros and cons of a cash flow loan
A cash flow loan may or may not be the right thing for your business.
There are a few factors you should weigh up before deciding to use one or not.
ProsÂ
Quick cash
The biggest benefit of cash flow loans is the access to funds quickly.
Invoice financing sometimes allows you to access funds 24 hours after submitting your application. As there is no asset valuation required, cash flow lending can help you quickly raise capital to cover cash flow gaps or take advantage of opportunities.
These opportunities can include things like business expansion, trade discounts and marketing initiatives.
The quick cash injection can also be beneficial for businesses that may need to fund emergency expenses or who are struggling through a quiet period.
In business terms, it’s true that sometimes you need to spend money to make money and sometimes these loans can be just the boost a company needs to find its feet.
Avoids long-term debt
Instead of loading debt onto your business, you can release the capital tied up in your accounts receivable.
This type of financing allows you to boost your cash flow without locking you into any lengthy contracts or repayment schedules.
Easily accessible
Cash flow financing is a lot more accessible than a traditional asset-based secured loan.
Even if you’ve only been in business for a short period, have a poor credit score, or don’t have high-value assets on your balance sheet, you can still qualify for a cash flow loan.
No security needed
Cash flow loans differ from secured business loans as you don’t need to use your home as security.
For loans where you do add your home as security, you risk losing it if you’re unable to make repayments.
Cons
Can reduce profits
A major consideration when it comes to deciding on whether to use cash flow financing is that you will reduce your profit margin.
When you submit an invoice for financing, the funding provider will usually charge a fee based on the percentage of the invoice value.
If your business relies on high volumes and low margins, this may eat away at your profits.
Credit limit based on invoice value
Credit limits for cash flow loans are dependent on the value of your sales revenue.
If you need a large lump sum to cover a significant expense, this may not provide you with the total amount you need. Equipment financing can aid these funding requirements.
For small businesses and start-ups, having access to a quick cash injection can often be just the boost they need.
Perhaps they need to cover an emergency expense, or they have an opportunity that will help grow their business.
Whatever it may be, cash-flow loans provide a quick solution.
If you’re looking at a cash flow loan for your business, reach out to the Inovayt commercial finance broker team today.
Curious about how a cash flow loan can help your business? We're here to help!
