What are cash flow loans & how to get one?
A cash flow loan is an option if your company needs immediate funds.
These loans are easy to get and don’t require collateral or assets. A business cash flow loan does have a shorter repayment time and higher interest rates. Learn everything you need to know about business cash flow finance below.
Your business’s cash flow is the key to its success. Cash flow is a key component of any business. However, cash may not always flow in the right direction. You may be short of cash due to unexpected bills, seasonal trading, or higher hiring costs.
Cash flow finance can be a short-term solution. Business cash flow loans provide funds for your business to cover costs that are not being met and relieve stress when you have a healthy cash flow.
Continue reading to learn more about cash flow finance. We will show you how to apply for cash flow finance, what cash flow-based lending can be used for, their pros, and where to get cash flow finance.
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What is a cash flow loan?
A cash flow loan or cash flow finance is similar to any other loan in that it works in many ways. Cash flow lending allows you to borrow the amount that you need to pay your expenses and have a healthy cash flow. You then repay this sum with interest.
Cash flow finance can be different from traditional lending, and long-term loans for businesses in many important ways.
- Most cash flow loans are based on future income: Unlike other loans that are based on assets, cash flow lending can be unsecured without a personal guarantee. Lenders will look at your cash flow and your future income and determine how much you can borrow with the cash flow loans.
- Your business performance is more important than your credit score. However, lenders will take into consideration your past and projected future performance when considering your application for a cash flow loan.
- Faster to get cash flow loans: If you are eligible, your application for a cash flow loan will be approved faster than a standard loan.
- A cash flow loan is for short-term purposes only. You will need to repay your cash flow loan within months instead of years. The cash flow loan repayment term will vary depending on the lender and loan but it is typically between one and twelve months.
- These loans have higher interest and fees. A cash flow loan is both short-term and unsecured, a cash flow loan typically has higher interest rates and fees than traditional business loans.
- It may be necessary to give a personal guarantee. This means that if your company defaults on the cash flow loans you will be personally responsible for the remainder.
Can I use a loan to fund my cash flow?
A cash flow loan may be necessary for a variety of reasons. These are:
- Paying day-to-day business expenses, such as rent and bills, is possible
- Coverage of seasonal trading dips
- For seasonal demand, you might need to hire more staff
- Stock purchase
- Essential business equipment can be hired or bought
What are some of the benefits and drawbacks of a cash flow loan?
Cash flow loans are a good option for funding businesses that have immediate cash problems but don’t have the credit history or assets to secure a loan.
- They are easy to find.
- There is no need to place any collateral or assets.
- Companies without strong credit histories can still access them.
- If they are paid off within a short time, they can improve your credit score.
However, you should be aware of the possible drawbacks to cash flow loans, just as with any other form of lending.
- These are not long-term solutions to cash flow problems.
- The interest rates for business loans are generally higher than those for personal loans.
- Origination fees (i.e. The fee charged by a lender to process the loan.) Late payment charges are usually higher than for other business loans.
- A personal guarantee may be required to ensure that you will pay the repayments in case your business fails.
- Some lenders may require automatic payment, which means you will have to pay regardless of whether you have the funds.
Other types of cash flow lending
There are three main types of cash flow financing: unsecured cash flow business loans and unsecured cash flow company loans.
Merchant cash advance
A merchant cash advance is a way to get money for your business if you receive frequent debit and credit card payments.
The lender would pay you a lump sum. Once the loan amount is paid, the lender will repay you through a pre-agreed percentage from your future debit or credit card transactions.
Revolving credit facility
A revolving credit facility may be right for you if you need more flexibility in your borrowing.
This is a type of business credit line that allows you to withdraw or repay funds at any time you wish for during the term of your agreement.
Imagine that you had a maximum limit of £10,000. The maximum amount you can borrow is £2,000. This loan will be repaid in three months. Only the £2,000 borrowed will be charged interest. After that amount is paid in full, you’ll be able to access the full £10,000 as long as the agreement period has not expired.
Invoice finance
Invoice finance is a good option if your business regularly invoices clients. This is when you borrow money to pay off unpaid invoices.
There are two types of invoice finance. Invoice factoring allows your lender to control the chasing of your clients for payment, while invoice discounting is up to you.
How do I apply for a loan to fund my cash flow?
The following information is required to apply for a cash flow loan:
- Your business details such as name and registered address
- The number of years that you have been trading
- Your average monthly turnover and card sales
- The amount you want to borrow
This will allow the lender to assess your eligibility and determine if you are eligible for a cash flow loan.
Then, you will need to follow the instructions provided by your lender.
Contact us today to speak with cash flow lenders and seek advice to see if this is the best business loan for you.