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How do you assess the eligibility and suitability of different cash flow financing options?

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Cash flow financing is a way of borrowing money based on your future or expected cash inflows. It can help you overcome short-term liquidity gaps, fund growth opportunities, or improve your working capital. However, not all cash flow financing options are suitable or available for every business. In this article, you will learn how to assess the eligibility and suitability of different cash flow financing options for your cash management needs.

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Mattia Mucci

Treasury & Finance Manager

1 Types of cash flow financing

There are various types of cash flow financing, such as invoice factoring, invoice discounting, merchant cash advance, revenue-based financing, and asset-based lending. Each type has its own advantages and disadvantages, depending on your business model, industry, cash flow cycle, and credit profile. For example, invoice factoring can provide immediate cash by selling your unpaid invoices to a third party, but it may also affect your customer relationships and reputation. Invoice discounting, on the other hand, allows you to retain control over your invoices and collections, but it may require more stringent credit checks and reporting. You should understand the features, costs, and risks of each type before choosing one.

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Mattia Mucci

Treasury & Finance Manager
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First you have to answer to this question. Why I’m going to finance cash flow? Then you can find the right type of cash flow financing. If you have to finance the working capital you can use short term method such as factoring, confirming, dynamic discounting, invoices discounting but if you have to finance investment that will generate more in-flows in the future, you have to choose a method that gives a long term finance such as bond and mortgage. If the duration match is not respected you will have some financial problems.

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Karim Farah

Accounts payable Team lead at CMA CGM
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Assessing the eligibility and suitability of cash flow financing options involves analyzing factors like the business's cash flow stability, creditworthiness, and the specific terms of each financing option. Consider interest rates, repayment terms, and how well the financing aligns with your business needs and growth plans. Consulting with financial experts can provide valuable insights tailored to your situation.

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2 Eligibility criteria

In order to qualify for cash flow financing, you must meet certain eligibility criteria set by the lender or financing provider. These requirements may be different depending on the type of cash flow financing, the amount of funding, and the industry you operate in. Generally speaking, businesses must have a positive or stable cash flow, or a high growth potential; a minimum revenue or turnover ranging from $10,000 to $100,000 per month; a minimum trading history of 6 to 12 months; a good credit score and history, or a strong guarantor or collateral; a low debt-to-equity ratio and a high interest coverage ratio; a diversified customer base and a low concentration risk; and clear and accurate financial records and projections.

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Mehran Salimian, MBA

Tech Lending Specialist
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Not every business is able to hit all of those qualifying metrics KPIs. If weak with a particular KPIs , it’s possible to mitigate risk associated using other strong KPIs and be ready to have the financing prices based on risk associated with the type of business and sector

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3 Suitability factors

When considering cash flow financing options for your business, it's important to meet the eligibility criteria and consider the suitability factors. These factors include the purpose and urgency of the funding, the amount and frequency of the funding, the impact on your cash flow and profitability, and the impact on customer and supplier relationships. Some cash flow financing options can provide faster access to cash but charge higher fees and interest rates. Others may require more collateral or security but provide larger and more flexible amounts of funding. When evaluating your options, you should calculate the net effect of each option on your cash flow and profitability, as well as assess the potential benefits and risks of each option on customer and supplier relationships. Ultimately, you should choose an option that best fits your business needs and situation.

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Mehran Salimian, MBA

Tech Lending Specialist
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Offer Personal guarantee from the founders or operating principles as a collateral to obtain a higher financing amount or better pricing.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you assess the eligibility and suitability of different cash flow financing options?

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1 Types of cash flow financing

2 Eligibility criteria

3 Suitability factors

4 Here’s what else to consider

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