What is cash flow lending?
Cash flow lending is available to businesses to cover day to day operating expenses such as wages, rent and inventory.?
Cash flow loans are a form of unsecured lending, which means it doesn’t rely on business or personal assets as security.
Cash flow funding isn't subject to the same assessment of a business’s financial health. Lenders won’t put the same level of attention into assessing your business financials.?
It's short term lending; eligibility comes down to the business’s ability to make money in the near future and repay the balance.?
How does cash flow lending work?
Cash flow lending is a popular for small businesses that unable to get a traditional business loan.?
You may not have the assets to secure a loan against, or a sufficient credit history, or a track record of profitability. All of these things are generally relied on by lenders in order to give a loan.?
While this makes cash flow finance easier, it will cost you more in rates and fees. Because the assessment is lower, it’s considered more risky by. Interest rates and establishment fees will be more than traditional loans.?
Cash flow lending is useful in businesses where cash on hand ebbs and flows. Most businesses will have varying levels of cash, and managing these reserves can be difficult; especially for small business. Seasonal businesses that have high peak seasons and periods of much lower activity is a good example of this.
In the quieter months, or periods within each month, the business may not have the cash on hand to cover overheads such as rent, utility bills or wages. It can borrow against its future earnings from the upcoming busy period in order to cover these costs.?
Similarly, if a business is eyeing expansion or a new piece of equipment that will increase its production, it can look to cash flow funding to finance these purchases so it doesn’t kill cash flow that’s needed to meet ongoing operational needs.
Limitations of cash flow lending for businesses
Cash flow lending has the advantage of being a more accessible form of finance, particularly for small businesses. The limitations also include:
Higher fees
High fees refers to much more than just above average interest rates. There’s an origination fee as well as regular account fees and significant late charges if you miss payments.?
Missed payments are not uncommon among cash flow borrowers, particularly because they’re taking out a loan at a time when the business’s incomings tend to be less than normal or unpredictable.?
Personal guarantees
While a cash flow loan isn’t secured against your assets, that doesn’t mean the lender has no right to claim items if you default on the loan. In fact, its claim can be even further reaching than a standard loan.
Lenders can place what’s called a general lien on a business, which means the entire business will serve as collateral if needed. As the business owner, signing the loan agreement also makes you personally responsible for repaying the debt.
These guarantees are typical of bank funding and term loans.
Automatic payments
Lenders require businesses to repay cash flow loans through regular automatic payments, often every week. If the business doesn’t have the funds in the account for any reason, it’ll result in a missed payment and a late fee.
This may not be an issue, but if business fluctuates between busy periods and down times, you’ll need to pay close attention to your bank balance to ensure you can make each repayment. Businesses that take out cash flow lending do tend to be more variable, which may make this a more likely situation.
Cash flow lending versus Asset backed lending.
There are a few key differences between lending on asset-based and cash flow lending. One big difference is the collateral is different. Asset-based lending is secured against assets such as property, equipment or inventory, while cash flow lending is based on expected future income.?
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Future cash flow is also considered by lenders when assessing asset-based lending, but not to the same degree.?
Asset-based lending tends to be better suited to larger organisations with bigger balance sheets and assets that can serve as collateral. It’s also a good option for companies that don’t have significant cash flow.
Cash flow lending is a better option for businesses with higher margins, or smaller businesses that don’t have valuable assets to secure a loan against.
Financing solutions to improve business cash flow
There is also a range of other cash flow solutions you can use. Use a finance broker to help you lodge your application. It may be that the best solution is a combination of two or more strategies.
Obtain short-term loans for working capital
Short term loans are easy to get approval for and quick to action, with some lenders able to deposit funding the very next day. While they often come with above average interest rates, the cost can end up being lower than with other borrowing because you’ll pay it back faster.?
Use small business lines of credit
A small business line of credit is like a credit card. Businesses can get approved for a certain amount of borrowing, and you’re charged interest on the outstanding balance – not the whole amount of credit. However, there is often an additional undrawn fee of the full facility.
Shorten client terms on paying invoices
The sooner your customers pay their invoices, the better your cash flow will be. This is about finding a balance of what’s reasonable – telling customers invoices are due in a couple of days probably won’t go down that well.
There are a few ways you can do this:
Make use invoice financing
Invoice financing is another way to effectively get invoices paid faster, but it works slightly differently. Invoice cash flow finance works by using a specialist service to lend the value of your invoices, which is repaid when customers pay their balance.
You can essentially get invoices paid straight away. Fund tap are good in this space. They can transfer the funds on the same day you apply. This makes it one of the quickest cash flow finance solutions.?
Summary and next steps
Invoice financing is perhaps the best option for businesses looking to eliminate or minimise the amount of cash flow lending they need to take out.?
You don’t have to choose one option or another – in fact, elegant cash flow solutions use multiple techniques alongside each other. Invoice financing is particularly effective in complementing other strategies to provide better cash flow while keeping costs down.
Are you looking for a business loan?
I'd be gad to help you.
Matthew Stack - 0423 237 242
Loan Market - South West Comemrcial
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