Businesses struggling with cash flow problems often feel like the light at the end of the tunnel is impossible to reach, especially when there isn't reliable working capital on hand. When you need fast funding to keep your business afloat, cash-flow loans can be an excellent method to make your current financial strains much more manageable.
Whether rent and payroll are due during a particularly slow season or an extensive revenue-growing project pops up, cash flow loan products can be the cushion your business requires to reach its goals. Keep reading to learn more about these loan and financing products and how they can greatly benefit your business.
What Is a Cash Flow Loan?
Cash flow loans are valuable lending and financing products typically used for working capital needs. You may also hear them called asset-based business lending because projected future cash flows secure them as assets. Secured loans require collateral, such as your future revenue or physical assets, to mitigate risk for your cash flow lender in case of default.
Cash flow lending considers expected future cash flows and annual sales, allowing you to borrow money based on these projections and metrics. This is a fast, flexible, and accessible type of financing that can cover cash flow gaps when you require capital, making it a favorite among seasonal and younger businesses alike.
How Can Cash Flow Lending Help My Business?
Having adequate working capital is one of the most crucial yet challenging parts of operating a business. Tracking the flow of revenue and expenses over long periods often gets confusing, but cash-flow loans are designed with quick repayment or refinancing in mind.
That means you won't make loan payments long-term. This aspect of asset-based lending makes it a wise choice for companies without significant financial assets that need money in a matter of hours or days, not weeks.
When you just can't wait, these products can provide positive cash flow, such as during slower seasons or when new revenue opportunities arise. Therefore, many growing enterprises use cash flow loans to offset current strains on their company’s financial health.
Benefits of Cash Flow Lending
Asset-based loans are fast and flexible, offering a safety net for small enterprises experiencing cash flow shortages or other ongoing revenue issues. The capital provided with cash flow financing is beneficial in a variety of applications, including:
1. Stocking Inventory
Cash flow loans are the perfect product to keep your company's inventory well-stocked. The loan amount can acquire inventory outright or buy supplies required to finish manufacturing products for customers to purchase.
2. Supplementing Seasonal Sales
Seasonal businesses that experience fluctuating sales periods, like bigger booms during back-to-school months or over the holidays, can benefit from cash flow lending to handle those slower months. You'll receive adequate funding to stay afloat throughout the year.
3. Payroll Funding
Leaving hard-working employees unpaid for their daily efforts is never okay, but you don't have to worry with cash flow loans on hand. Cover payroll expenses if you ever come short or hire new employees to better prepare for an upcoming busy season by applying for cash flow loans.
When looking for payroll funding for small businesses, you most likely need money fast. The best business funding products for cash flow problems related to the payroll is usually short-term business loans, business lines of credit, or merchant cash advance. These products are known for quick application and approval, with limited documentation required. You can find these products with online lenders, alternative business lenders, or business loan brokers.
The flexibility of asset-based lending makes it possible to fulfill essential payroll expenses and fuel other operational costs whenever required.
4. Covering Daily Expenses
Cash flow lending options can also pay daily expenses to continue operating smoothly. Examples of everyday business expenses you can use this operating cash flow loan for include:
- Property taxes
- Postage and shipping
- Vehicle fuel
5. Funding Revenue Opportunities
When your business is presented with an exciting new opportunity to increase revenue, the last thing you want is to withdraw from consideration just because you don't have enough cash. Small business owners use cash flow lending to help handle such occasions sufficiently.
Choosing the Best Cash Flow Loan
There are quite a few choices to filter through regarding cash flow lending. A business owner must do thorough background research before settling on the best business loan options for their needs. Some of the most popular cash-flow loans and financing options include:
a. Short-Term Business Loans
These short-term loan options offer less extensive terms but higher interest rates, giving your business access to upfront cash to cover expenses in a pinch. Short-term loans are an excellent option for newer operations or those struggling with cash flow shortages during slower seasons, thanks to more lenient credit ratings and eligibility requirements.
b. Invoice Factoring
Also known as invoice financing or accounts receivable financing, this financing method makes it possible to receive payments for outstanding client invoices before they're due. An invoice factoring company will advance the unpaid amounts to your business upfront before collecting automatic payments from your customers or suppliers directly, giving you access to immediate cash.
c. Merchant Cash Advances (MCA)
MCA provides a lump sum of money upfront to your business bank account in return for a portion of future credit card sales, making it a solid choice for businesses completing a significant amount of credit card transactions. It's important to note that this is an advance of cash flow, not a cash flow loan.
d. Business Cash Advances
In contrast to a merchant cash advance, business cash advances collect payments from your business bank account, and the amount you repay is based on projected future cash flows. Business cash advances also act as revolving cash flow because there is no term limit and are the perfect product for companies with significant cash flow potential.
e. Business Lines of Credit
This option is not a loan but a revolving line of credit, allowing you to make purchases up to a limit set by your lender, only paying interest on the balance you owe. Business lines of credit are one of the best financing tools for any purchase because you can continue to borrow money if you pay the remaining balance on time.
Meeting repayment terms for a business line of credit means access to more cash on-demand, and then, the line can be renewed.
FAQ: All About Asset-Based Lending
If you still wonder what a cash flow loan is and why asset-based lending is beneficial for budding businesses, read through the frequently asked questions below to cover your bases.
What Are Common Cash Flow Financing Requirements?
Cash flow loans come with unique requirements like any other loan or financing product. Banks and online business lenders alike will look at the following:
- Balance sheets
- Credit history or score
- Time in business
- Outstanding debts
- Business plans and projections
Can I Qualify for Cash Flow Based Loans With Bad Credit?
You can absolutely get approved for cash-flow loans with bad credit, which is why they're so great. Asset-based loans allow any business owner to qualify for impressive loan amounts.
Where Can I Apply for Cash Flow Loans?
This answer ultimately depends on the loan you choose, your credit rating, and what you can afford. Banks and credit unions have more attractive interest rates but stricter eligibility requirements, while online lenders offer more flexible, affordable loan or financing options. Whatever lender you settle on, always read the fine print thoroughly before signing a loan.
What Kind of Rates Can I Expect for Cash Flow Loans?
Several factors influence interest rates for asset-based loans. By looking at various details, lenders consider their risk levels before approving a loan. How much money you are borrowing, repayment terms, time in business, and your credit history are all components in determining the interest rates for your loan.
You might also be required to provide certain statements backing up your business's financial health, such as balance sheets, tax returns, and annual sales, before receiving your requested loan amount.
Why Does My Business's Balance Sheet Matter?
The first step for lenders in the underwriting process is determining your ability to meet repayment terms. So, will you be able to pay this loan back? Banks and other lenders look at a balance sheet to better understand your business's past performance and assess its ability to accrue enough revenue to repay promptly.
Large balance sheets will work to your benefit, providing your lender with an extensive track record of your revenue history. However, don't worry if your balance sheets are lacking or nonexistent, as many loan options are available for startup enterprises with less time in business.
Will I Need to Offer Collateral for a Cash Flow Loan?
Unlike unsecured loans, typically, secured loans require collateral, holding you personally responsible if you fail to repay and default on the loan. Collateral requirements vary based on the selected loan product, so it's important to understand each option and ask your cash flow lender these critical questions before applying.
Products like short-term loans can require either a personal guarantee or physical assets as collateral to secure the loan. At the same time, invoice financing and advancing methods use future sales as security. Examples of secured loan collateral include:
- Cash assets
- Physical collateral
- Personal and commercial real estate
- Stocks, bonds, and
- Certificates of Deposit (CDs)
- Equipment or vehicles
- Invoices or future revenue
The Final Verdict: Cash Flow Loans Are Valuable for All Businesses
Whether you’re borrowing money for everyday working capital needs or to cover current cash flow issues, small businesses can benefit from asset-based lending. Even with a poor credit history or minimal time in business, asset-based loans can be advantageous to a seasonal business or other operations.
Many different asset-based lending options offer strong cash flow, so thoroughly researching the right choice is crucial. AdvancePoint Capital helps you explore business financing options and finds the best cash flow loan or financing product for your needs.
While other lenders have higher interest rates, stricter credit history requirements, and longer repayment terms, we provide asset-based loans from a marketplace of affordable, accessible lenders. Contact us to learn more about asset-based lending options from AdvancePoint Capital and get cash flow funding today.