Does your business have a good history of positive cashflow but you’re nearing the limit of your credit line? Are you growing rapidly or developing a new product and not recouping the investment just yet? Using a cash flow loan could help with your working capital needs.
How does it work?
A cash flow loan is used to meet working capital needs and is based on using a company’s future cashflow to make repayments. Small businesses that need to boost working capital but don’t have collateral can get this type of business loan to cover working capital needs.
How does a cash flow loan differ from a traditional bank loan?
Traditional bank loans require certain lending criteria that are more stringent than for a cash flow loan. These include checking the potential borrower’s financial statements, profit and loss, and bank statements. A new business might be required to provide a business plan as well. In many cases, a bank business loan will require some form of collateral, such as a personal guarantee or security over property. The process for getting a traditional bank loan can take from weeks to several months. The long timeframe makes this type of business loan unsuitable when the funds are needed quickly.
With cash flow borrowing, the lender uses different lending criteria. This can include checking recent bank statements to determine if the borrower will be able to make the payments. Online cash flow lenders use leading-edge technology to determine the creditworthiness of a potential borrower which means there’s no requirement to submit large amounts of paperwork such as a business plan, although financial statements will be required.
Unlike with banks, this background research is conducted quickly – most cash flow lenders can decide within 24-48 hours and transfer funds immediately upon loan approval. Given the quick timeframe for getting a cash flow loan, it’s preferable when money is needed in a hurry. Another attribute of these loans is that they are unsecured, meaning they don’t require collateral, however a personal guarantee will be required.
Typical uses for a cash flow loan
Given the speed and ease of getting a cash flow loan, it’s easy to see why they are becoming increasingly popular among SMEs. So what can this loan be used for? It could help you:
- Get working capital to pay suppliers while waiting for payments from customers
- Buy discounted stock available for a limited time
- Employ new staff to meet the needs of your growing business
- Buy inventory to meet seasonal demand
- Initiate an online marketing campaign to grow your business.
Things to consider
Even though a cashflow loan may be the answer you need for your working capital, as with any financial package there are careful considerations to make before you use this type of funding. We’ve highlighted some of the key factors to bear in mind.
- 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. Longer expected ROI on a new product or unexpected expenditures can add up and lead to further debt. Although a cashflow loan is not secured with collateral, your assets will be at risk if you are not able to make the payments on the loan.
Because cash flow loans are not secured, there’s more risk for the lender. Higher risk means a higher interest rate. Although the interest rate will be higher, these are short-term loans (six months to 24 months), so the overall amount of interest paid can be less than with a long-term traditional bank loan.
Summary
If your business is on the rise or you need to get a new product to market in record time, a cash flow loan could be the solution to give you quick access to cash, allowing space for your working capital. We work with a range of businesses, helping them with their funding solutions, get in touch with us today and let’s help you get the right financing in place to help your business grow.