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What is cash flow lending? Benefits, risks and cash flow loans explained

Capitalise Mar 22, 2024

Cash flow lending is a type of financing that uses future cash flows as the primary factor in determining eligibility and repayment ability. As with any kind of funding, it’s important to understand the benefits as well as the risks of cash flow lending to decide whether a cash flow loan is a good fit for your business. Here’s what we’ll cover:

  1. How does a cash flow loan work?
  2. What are the benefits of cash flow lending?
  3. What are the risks of cash flow lending?
  4. What are some examples of cash flow lending?

If you’d like to start by finding out more about what cash flow is, why it’s important and how to manage it better, take a look at our small business guide to cash flow.

How does a cash flow loan work?

Cash flow lending is a type of unsecured business loan, offered on the basis of forecasted cash flow, that businesses typically use to support daily operations. The main factor that sets cash flow lending apart from asset-based lending or traditional bank loans is the criteria that lenders use to determine whether your business is eligible for a cash flow loan.

There’s a lot to unpack in our cash flow lending definition, so let’s break it down.

 

In what way is cash flow lending unsecured? 

We say that cash flow lending is unsecured because it doesn’t require your business to put up any assets as collateral. Unlike asset finance, a lender will consider the ability of your business to generate consistent cash flow – rather than the assets it owns – as the basis for offering your business a cash flow loan.

 

How is a cash flow loan different to a traditional bank loan?

When you apply for traditional business loans from a bank, they will consider a wide range of financial health indicators including your business credit score and credit history. When you apply for a cash flow loan, the lender’s primary concern is simply whether or not your business is on track to bring in enough money to pay it back. 

 

What are cash flow loans used for?

Cash flow loans are typically used for day-to-day expenses like paying staff and suppliers, covering rent and utilities, or even purchasing inventory. Think of it as borrowing from your forecasted future cash flow to pay for the things your business needs right now. 

What are the benefits of cash flow lending?

Whether or not a particular kind of funding is right for your business depends on multiple factors, so it’s best to explore a wide range of finance options to find the best fit. Let’s take a look at some of the potential benefits of cash flow lending.

 

It’s an easy way to smooth out cash flow

For many businesses, particularly those impacted by seasonality, cash flow lending is a quick and easy way to bridge a short-term gap in cash flow. By securing a cash flow loan on the basis of expected revenue during your busiest months, you can keep daily operations running smoothly during your quietest months.

 

You’ll get the funding you need, fast

Because the eligibility criteria is less complex, you could get a faster business finance decision from a lender when you apply for a cash flow loan, as opposed to other kinds of business lending. If your cash flow needs are immediate, this speedy application process could be crucial for keeping daily operations running smoothly.
 

It could be easier for you to access

Smaller businesses or startups with a less significant credit history may be more likely to be approved for a cash flow loan than a more traditional loan or other kinds of business finance. Cash flow lending can also be an attractive option if your business doesn’t have any physical assets to put up as collateral.

 

Business credit scores are less important

Although a lender will take your business credit score into account when you apply for cash flow lending, it will carry less weight than your business performance. This is helpful if your business credit score could use improvement. In fact, securing a cash flow loan and paying it back quickly could ultimately have a positive impact on your business credit rating.

 

If you’re not sure whether cash flow lending is a good fit for your business, make sure you speak to your accountant, financial advisor or one of our funding specialists at Capitalise.

What are the risks of cash flow lending?

As is the case with any kind of lending, there will always be risks, limitations or disadvantages depending on your specific business and funding requirements. Here are a few things to consider before applying for a cash flow loan.

 

Shorter terms 

Cash flow loans are designed to be paid back very quickly, generally within a maximum of 12 months. It’s also important to keep an eye out for automatic payments as some lenders may include this as a requirement. If your cash flow loan comes with automatic payments, you’ll need to make sure you always have sufficient funds in your account to avoid missing repayments or paying late – which could mean having to pay additional fees.

 

Higher costs 

Because cash flow lending is unsecured and paid back over a shorter term, both the interest rates and fees tend to be higher than other kinds of business finance. While having a lower business credit score won’t necessarily be a barrier to securing a cash flow loan, it could mean being offered a lower limit than you applied for, or having to pay higher fees and interest to borrow the amount that you need.

 

Personal guarantees

Although you won’t have to put up any assets as collateral when you apply for a cash flow loan, a lender may ask you to sign a personal guarantee. This means you agree to take personal responsibility for paying back any debt that your business owes. Some lenders may also take general lien on your business, which effectively means that your business becomes the collateral.

 

Make sure you go into any funding application with an understanding of what affects a lender’s decision. Ask questions, compare options, and speak to a financial expert like your accountant for tailored advice.

What are some examples of cash flow lending?

A cash flow loan is the simplest example of cash flow lending. However, there are other kinds of funding similarly designed to help take the pressure off your cash flow and keep day-to-day business operations on track. Here are a few common examples.

  • Working capital loan: short-term funding that can be accessed quickly to cover operational costs like wages, utility bills or rent.
  • Invoice finance: a way to access the cash owed to your business in outstanding invoices upfront, instead of waiting 30, 60, or 90 days to get paid.
  • Revolving credit facility: flexible credit you can dip into and pay back when you need a cash injection to bridge or speed up cash flow.
  • Merchant cash advance: an unsecured business loan that allows your business to raise finance against your future credit card sales.

At Capitalise, we work with over 100 lenders to help you find the right funding for your business. If you’re looking to ease the pressure on your cash flow, bridge a short-term gap, or even speed up cash flow to seize a new opportunity, start a funding search today.

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