Cash flow financing option takings less time to put cash into your hands. The process is less tedious, too, compared banks, which require assets as collateral before approving loans. Cash flow loans, in contrast, are advanced to business owners based solely on their business's cash flow, as in their past and future projections. And no collateral is required.
This is a must-read guide on everything cash flow financing (and why business owners consider this to finance their small business).
Basics of Cash Flow Financing
A steady growth of finances makes it easier, faster for you to access financing for your business. The loan is approved faster if your business generates lots of inflow of cash.
Cash flow loan lenders are after the performance of a business. They want to see your net income, and determine whether your business can cover all its debts. They want to know if your business can handle additional debt, and still steadily grow its cash flow while at it.
You can make weekly and bi-weekly payments on cash flow loans. Other loan providers accept monthly payments as well, which help grow more inflow cash. It is, thus, prudent to use money from the just right loans to consistently grow and enhance your business.
Four Common Types of Cash Flow Loans
These types of loans for small businesses are many, and they are equally different from each other. See what’s best for you, and when it’s ideal to take the loan.
- Invoice financing
Any business owner is elated, even euphoric whenever they land large orders from a big contract with a government agency or large corporation. Because this translates to big business.
To meet their short-term needs for large orders, businesses have to secure large amounts of cash. This is where Invoice financing comes in. It allows small business owners to borrow money based on the amounts of cash due to the customer.
In other words, if the amount from a customer is, say $50,000 that’s the amount a cash flow loan provider will lend you. So who provides this type of cash flow financing? Large corporations, financial institutions sometimes even government agencies themselves.
Invoice financing is best for?
- Top-tier businesses who’ve achieved vendor status with large corporations or government agencies. Such businesses are eligible for invoice financing.
- Any business with a history of making credit sales, and often collecting majority accounts receivable within a period of 2 to 3 months. And not before.
- Credit line
Every business needs capital to keep it going. Credit line loans are meant primarily to help with all your working capital needs as well as investment opportunities.
However, there needs to have an existing relationship between a borrower (business owner) and an institutional before to have access to credit line financing.
Imagine running a business and suddenly experiencing cash flow issues. Seasonal cash flow gaps are often inevitable, and sometimes you need financing to keep the business going. That’s where credit lines come into the picture. They keep your business afloat and saves you time and money. The advantage of this type of cash flow loan? Low-interest rates.
Credit lines are best for?
- Small businesses experiencing cash flow gaps. As a cash flow loan, it provides fixed cash amounts that save a business from ‘sinking’. It is best for those times a business has little or no cash flow as working capital.
- If say a contractor, vendor or supplier doesn’t accept credit card payments, you can use this financing option to pay them. This type of loans help make periodic cash payments easy.
- Term Loans
If you’ve ever applied for a car loan, student loan, or mortgage then you are familiar with term loans and how they work.
For example, a cash flow financing provider can offer a business term loan of up to $70,000 with 5% interest rate, terms for 2 to 5 years, with weekly or biweekly payments.
There are factors, however, you need to meet before accessing this type of cash flow financing. You need to have a stipulated credit history, a predetermined amount of money, and a given number of years in business operation. The good thing about term loans? Fast approval times.
Term loans are best for?
- Established businesses looking for an investment opportunity to generate a steady cash flow from an initial investment.
- Business credit cards
The easiest ways to cover your cash flows, short-term needs is to access business credit cards loans. This type of cash flow loan is the most highly preferred way to finance business projects by business owners.
However, if your business has large cash flow gaps or capital-intensive projects, rest assured you will attract high annual percentage rates (APRs). But this will largely depend on your credit history.
Business credit cards are best for?
- Small businesses looking to increase their short-term purchasing power. This type of financing option easily helps achieve that and also helps cover operational costs of a business.
- If your business has been in operation for less than a year, business credit cards will help secure debt financing for it as well as build a good business credit history.
When Does Cash Flow Loans Benefit Your Small Business?
If you are wondering if this type of financing is good for you, ask yourself what will happen to your business in case of an emergency or opportunity. Are you ready to face these two scenarios? Are you prepared? What measures have you put in place when such scenarios arise?
- Emergency – Every business owner knows cash flow gaps are at some point inevitable in a small business. Financial challenges will always creep on you, and it can get tough, especially in an unexpected emergency. You don’t have to experience that.
You may argue you have an emergency fund in place, but sometimes having enough to save can be a problem. So applying for a loan to finance your small business when emergencies arise can help keep the business afloat during turbulent times.
- Opportunity – It is a given: opportunities always present themselves when you least expect them to but are you and your business prepared for them? To make the most of new business opportunities it’s not only important to have enough resources, but also enough money at your disposal. Applying for cash flow loans can help with that.
Frequently Asked Cash Flow Financing Questions:
How can I tell which loan is best suited to meet my debt financing needs?
Simple! Compare one loan against another to help you make an informed decision. Best way to do this? Identify each loan’s annual percentage rate. APR acts as a benchmark to effectively calculate how much payments you need to make yearly, including service charges, fees, and interest payments.
Put it another way, it helps you with estimates your debt financing options. For example, let’s assume you are considering choosing an invoice financing and term loans. The former cash flow loan (invoice financing) boasts say an APR of 15%, and the latter (term loans), 36%.
Make sure to choose a cash flow financing option with a lower APR. This will help you finance your debt fast and within an acceptable percentage range. The APR will help you evaluate the cost of a loan before applying for it.
Does my business credit history determine which cash flow financing to choose?
Not all cash flow loans require a business credit score as a requirement. However, a select few will require a business owner to have, at least, an Employer Identification Number (EIN), which is equivalent to a Social Security Number for a business.
It is from the EIN that you’ll build a business credit score. It is important to build and maintain a good business credit history for good financial record keeping. Also, for the sake of tracking your business's financial activities by credit reporting agencies as well as the IRS.
How long must I wait to re-apply for a cash flow loan when turned down with a lender?
Here’s the thing, you stand a higher chance of cash flow financing if your business has been in operation for years on end. Often, loan lenders will require that you must have been in business for at least more than two years before they can consider your application.
Financing is without a doubt designed to meet your specific financial needs in a small business. What’s more? The loan application process is fast, business owners hardly need collateral, and business credit rating is not necessarily a requirement. Cash flow loans are simply convenient for a business.
Remember: Before applying for any of the aforementioned loans, determine what will work perfectly for you, and what you hope to do with the funds to cover sales payments in the future. The tips in this guide will help you to make an informed decision.