One of the most frequent barriers SMEs face issues with is cash flow. These problems stem from many sources: unpaid invoices and late payment (affecting thousands of small businesses), unexpected expenses or a fall in revenue.
In most cases, a cash flow issue is temporary. However, if left unchecked, it can quickly spiral, resulting in an inability to meet your financial commitments, disruption and even debt.
That’s why, if you experience reduced cash flow in your business, you need to take prompt action. Many external finance options are available to those looking for support to boost cash flow, which can provide relief while you iron out the underlying issues. One such option is a cash flow loan.
This blog explains how a cash flow loan works and whether one could be beneficial for your business.
What is a cash flow loan, and what are its benefits?
A cash flow loan is a source of finance that seeks to inject money into a business. It’s ideal if you are facing cash flow issues, as it is able to fill the gap and allow you to meet your obligations while buying time to improve cash flow internally.
They usually have a short term, between one to five years. This is beneficial as it means you’re only charged interest for a short amount of time – however, you need to clear the balance in the designated period.
The amount can vary between £10,000 and £250,000 and beyond, depending on the lender and eligibility of your business. This is why they are best utilised for more cash flow issues rather than to cover an extensive funding gap.
A cash flow loan will typically be unsecured, so you do not secure it against your assets to obtain funding. This allows more businesses to obtain a loan, however a personal guarantee may be required.
One of the main advantages of a cash flow loan is that it can be used for many purposes, including sourcing new equipment, paying suppliers and staff salaries, bringing stock in, covering rent, and so on. It supports the day-to-day running of your business rather than letting limited cash flow result in disruption, which could worsen your financial situation.
Another benefit is that the funding is typically released quickly – often in a matter of days or even hours – so you can take swift action to address the problems in your business.
What to consider
Although a cash flow loan is applicable if you are experiencing short-term difficulties, it doesn’t mean it is the answer in every scenario. There are careful considerations you must contemplate to ensure it’s the best option for you.
We’ve detailed some of the most significant factors to consider.
High interest
As a cash flow loan is usually unsecured, there is a higher risk to the lender who does not have an easy option to recoup their funds if you default on payment. This risk is often offset by a higher interest rate.
The good news is that, as the loan will only be short-term, the overall amount of interest you pay will be limited. However, you must be confident that you can meet the repayment schedule to successfully clear the loan balance and not end up in more debt.
Focus on performance
Unlike other forms of lending, most providers of cash flow loans will focus on your prior business performance as well as your credit history. While this can improve eligibility for some applicants, it does mean you need to be in a solid position to be accepted.
If your bank statements show a history of negative balances without an agreed overdraft, bounced payments or have dealt any defaults in the past, it may make it harder to secure a loan and leave you having to pursue other options.
Making repayments
Due to the short-term nature of most cash flow loans, you need to be sure you can afford to clear the balance in the agreed timeframe.
If you are experiencing cash issues, you need to be sure these are temporary and have resolutions in place to turn things around – such as better credit management practices or cost reduction. This will enable you to meet your loan repayments consistently.
If you cannot improve cash flow, it could place you in a worse position when you can’t meet the repayments alongside your other financial commitments, ultimately leading to debt and possibly bankruptcy.
Is it the best solution for you?
There are multiple solutions on the market designed to ease cash flow pressures. This includes secured options, which enable you to access funding at lower interest rates and potentially higher sums.
Examples of such options include:
- Secured loans – loans secured against commercial or personal property
- Asset finance – used for sales and leaseback of existing unencumbered equipment or the purchase of new equipment
- Invoice finance – unlocking finance stuck in your unpaid invoices while you await payment from your customers
- Trade finance – filling the funding gap when fulfilling orders for customers overseas in the UK or accessing supplies from abroad for domestic orders
- Stock finance – funding raised against stock sat in your warehouse
It is worth considering the other cash flow products available as they may better fit your needs.
If the issue extends beyond temporary cash flow problems, you need to consider other funding routes to address the root cause rather than offer a short-lasting fix. If you’re not sure what is the right way forward for your business, consider discussing your requirements with a commercial finance advisor.
Conclusion
A cash flow problem is an irritation to any business, but unfortunately, a common one. Most SMEs go through stages where cash flow fluctuates.
Most issues will be temporary but taking quick action can be the difference between getting things moving again and worsening the problem. A loan is just one of the many solutions available to bridge a funding gap.
By understanding how a cash flow loan works and ensuring it is the right fit for your needs, you can address any difficulties you face with a quick release of capital.
If you are experiencing cash flow difficulties, we can take you through the available support, including short-term loans.