Manage expenses or finance continued business growth — with a cash flow loan.
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What is a cash flow loan?
A cash flow loan is a form of debt financing — mostly used for working capital purposes. It allows companies to cover everyday expenses and to finance short-term projects.
Cash flow is the lifeblood of any healthy company. Businesses often need additional help during times when cash flows fluctuate, or when dealing with late paying customers.
Instead of needing physical assets as security (collateral), a cashflow loan sees a lender providing a borrower with a certain sum of money — backed by the borrower’s expected future revenues.
Cash flow loan — considerations
Cash flow loans are one of the easiest ways to get valuable funds for a business. It can be used to manage short-term cash flow challenges — enabling companies to continue daily operations. It can also simply be used as a source of additional funding — to support planned or specific activities. So things like developing new product lines, hiring new staff and other related growth and expansion plans.
Businesses where sales are seasonal, tend to experience cash flow difficulties — in periods where sales are low. In this situation a cash flow loan is useful, allowing theses businesses to continue trading — until sales pick-up again.
Small businesses, that grow rapidly, are also susceptible to cash flow issues — especially when they make sales on credit or experience payment delays from their customers.
With asset based lending, conventional lenders (banks) tend to exclusively require collateral — before approving a loan request. A number of SMEs (particularly in service sectors) just do not have the physical assets — essentially locking them out from obtaining finance. Cash flow lending is a way around this problem, letting companies borrow — mainly on expected future cash flows.
How do cash flow loans work?
After identifying that your business requires a cash flow loan — you would apply online. Applications can be made at bank branches, but there are a number of online fintech lenders — with faster application processes and often with better rates.
In your application you would typically include details of your trading accounts, bank statements, management information and a list of your current creditors and debtors. Along with your credit ratings, this will be used by the lender — to assess if you meet lending criteria.
Despite all the information required, eligibility for cash flow lending is determined primarily by — your company’s ability to generate cash flows. In other words, lenders are less concerned with the value of physical assets — on your company’s balance sheet.
Should the loan application be successful — funds can be disbursed on the same day, and can be put to work immediately.
Term lengths and charges all vary — according to the lender in question. However, interest will commonly be charged on a monthly basis — while term length will usually be a minimum of three months.
Other fees and service charges may apply, so you’ll need to study the contract carefully — before agreeing to terms.
Benefits of a cash flow loan
- Relatively quick to obtain
- Can be used for a variety of purposes
- Normally does not require collateral
- Funding scales as business grows — amount you can borrow is based on company revenue
- Repayment structure is flexible
- Can be used together with an invoice finance facility
Limitations of a cash flow loan
- Loans are generally short-term
- Short-term finance — relatively high interest rates
- Other charges may apply e.g. early repayment fees
- May require a personal guarantee
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