Table of Contents

  • What Are Cash Flow Loans?
  • How Are Cash Flow Loans Used?
  • Cash Flow Loans vs. Asset-Based Loans
  • 4 Types of Cash Flow Financing
  • Who Qualifies for a Cash Flow Loan?
  • How to Apply for Cash Flow Loans

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When businesses need funds, securing working capital as quickly as possible is crucial. Obtaining a short-term cash flow loan could be key to helping you through any financial shortfall.

We’ll review the basics of cash flow lending, how the operating cash flow formula affects your offer—and everything in between.

What Are Cash Flow Loans?

A cash flow loan, typically used for working capital, is debt financing that allows you to borrow funds against revenue you expect to earn in the future. This type of financing is quick to fund and provides the capital a business needs to fill cash flow gaps

Regardless of how it will be used, a cash flow loan is designed to be repaid quickly or be refinanced. Because a cash flow loan is an umbrella term for multiple funding programs, the factors involved in qualifying for funding can vary. However, businesses with strong sales increase their chances of qualifying for a cash flow loan, even if their credit score is at or below 580.

How Are Cash Flow Loans Used?

Cash flow loans are used in various ways, most of which revolve around short-term business solutions.

  • Increasing Inventory: Cash flow loans are often used to address inventory needs. You can replenish your seasonal reserves, purchase in bulk to secure a discount or account for any holes in your product line. Cash flow loans also can aid businesses looking to secure enough product to fulfill a large, unexpected order.
  • Upgrading Your Equipment: There’s never a convenient time for an essential piece of equipment to fail. With a cash flow loan, you can gain access to the funds you need to quickly fix or replace this asset. 
  • Weathering Spotty Seasonal Sales: Even when your retail business isn’t busy, bills and other expenses don’t stop. When you need support to get through the down season, a cash flow loan can sustain your business when sales are down.
  • Hiring Additional Employees: As your business needs grow, so does the size of your workforce. A cash flow loan can help you take on the costs of hiring new employees.

Cash Flow Loans vs. Asset-Based Loans

Regardless of the type of financing you pursue, underwriters consider your cash flow. This isn’t the only way to obtain funds, however. Another common way to secure a loan is by leveraging your assets.

The greatest differentiator between asset-based loans and cash flow loans is the role collateral plays.

Collateral

Asset-Based Loans

Asset-based loans are secured by valuables pledged by the business owner. Assets lenders accept as collateral include any income expected from accounts receivable, real estate owned by the company, equipment and inventory. 

Cash Flow Loans

Business loans based on cash flow don’t require collateral. This is a great option for younger businesses or those without much collateral to offer. The trade-off, however, is the funds are secured on the expected income of the company and its credit rating along with a personal guarantee from the owner. This means that in the event your business is unable to pay the balance of the loan, you will be personally responsible.

Other elements distinguishing asset-based loans from cash flow loans include the following:

Processing Time

Asset-Based Loans

Lenders typically take at least 30 days, if not more, to review an applicant’s loan submission. During this time, the lender will be evaluating nearly every aspect of the business, including balance sheets, and in some cases will conduct an on-site audit to examine any physical assets that will serve as collateral for the loan. 

Cash Flow Loans

With a cash flow loan, on the other hand, you can obtain financing much faster. This is possibly because of the way cash flow-based loans are underwritten. Using earnings before interest, taxes, depreciation and amortization (EBITDA) combined with a credit multiplier, lenders can account for any outside uncertainties, along with your own business’s risk. With this information, a cash flow lender can determine the principal and interest rate.

Repayment

Asset-Based Loans

Payback for asset-based loans comes in the form of weekly or monthly installments. This is determined by a few variables, including loan amount, term length, unique risk factors and overall business preference.

Cash Flow Loans

These programs also are repaid in small increments either through credit card holdbacks or fixed automated payments. Automatic payments are taken from the borrower’s bank account on a daily or weekly basis. With credit-card holdbacks, lenders pull a certain percentage of your daily credit card sales. Depending on the lender you work with, you can even choose specific days you pay.

Cash flow loans don’t require collateral, unlike asset-based loans.

4 Types of Cash Flow Financing

Although there isn’t a single type of cash flow loan, there are a few ways you can acquire cash flow financing.

1. Business Line of Credit

While comparable to a business credit card, a business line of credit features higher limits. This type of business cash flow loan is a flexible funding solution, perfect when your business needs are changing. It allows you to withdraw money whenever you need it, while only paying interest on the funds you borrow. 

Like a credit card, the money available to you replenishes with every repayment. Lines of credit can be secured with collateral or unsecured.

Loan Amount

Up to $250,000

 

Estimated Repayment Terms

6 months–2 years

 

Interest Rate

Starting at 8%

 

Speed of Funding

As fast as 1 day

2. Merchant Cash Advance

Technically, a merchant cash advance (MCA) isn’t a loan. An MCA lender provides you with a set amount of cash—based upon future earnings—upfront. In exchange, you repay this advance with a percentage of your sales along with any funding fees. One of the best features of an MCA? In most cases, you can get approved and funded within a day. 

Loan Amount

Up to $500,000

 

Estimated Repayment Terms

3–24 months

 

Factor Rate

Starting at 1.10

 

Speed of Funding

As fast as the same day

3. Business Term Loan

Business term loans are a one-time infusion of capital paid back over a given term. These programs are used for long-term investments including commercial real estate, large equipment purchases and debt restructuring. Term loans often have lower interest rates than other kinds of financing. 

Loan Amount

Up to $250,000

 

Estimated Repayment Terms

1 year–5 years

 

Interest Rate

Starting at 7%

 

Speed of Funding

As fast as 1 day

4. Short-Term Loans

Similar to conventional term loans, short-term loans are smaller in scale and have a much shorter repayment window. Considering these funds are used for businesses that find themselves with an ad-hoc need, these programs are usually paid off in 18 months or less.

Loan Amount

Up to $500,000

 

Estimated Repayment Terms

3–18 months

 

Interest Rate

Starting at 10%

 

Speed of Funding

As fast as the same day

Who Qualifies for a Cash Flow Loan?

Who qualifies for a cash flow loan depends on several factors, such as your debt-to-income ratio, projected revenue growth and operating cash flow. That said, getting a cash flow loan is most often an easier process than acquiring a conventional loan, and it’s a type of financing most businesses can reliably access. Here’s more information about the elements lenders consider for a cash flow loan approval. 

Cash Flow-Based Underwriting

A lender’s first step in the underwriting process is understanding whether or not your business already has any existing financing. To do this, lenders measure your debt-to-income ratio (DTI). This ratio gauges your ability to handle additional debt and how efficiently you can repay it. 

Once they understand your DTI, your lender searches for programs that make sense for your financing needs. The lower your DTI, the easier it will be for you to receive an approval.

Projected Revenue Growth

Underwriting is primarily based on past performance. This information, combined with your intended use of funds, will influence your projected revenue growth, therefore giving your lender a better idea of how much you may qualify for.

Projecting future revenues becomes a bit trickier for seasonal businesses, however. In this scenario, lenders might request financials from the previous year’s payback months (the period of time when you would be repaying your loan) to ensure a busier season is approaching.

Operating Cash Flow 

Operating cash flow is a formula that reveals how much money a company generates—such as what’s earned through manufacturing and the selling of goods or for services rendered. 

Also known as net cash from operating activities, operating cash flow focuses on recurring business activities and doesn’t include one-time expenses such as long-term capital expenses or investment costs.

Your operating cash flow gives lenders a clearer idea of what they can offer your business. The stronger your operating cash flow, the more likely it is you’ll receive a high principal with lower rates. 

Cash Flow Loans for Small Businesses With Bad Credit

Although bad credit limits program availability, options still exist. As alternative lenders are less risk-averse than conventional funders, they offer working capital to more business owners—including those with poor credit. This is done by evaluating the financial health of a business aside from credit score. If you take measures to improve your credit score, you’ll eventually qualify for more commercial cash flow lending options.

How to Apply for Cash Flow Loans

Applying for cash flow loans online opens your business to multiple funding options. 

By answering a few basic questions about your business, you can uncover funding opportunities within a matter of hours. Depending on the funder and type of cash flow loan you pursue, your funds can be deposited into your bank account the day you’re approved.

For example, Fast Capital 360 helps you find the best cash flow business financing options through 1 straightforward application. While each lender’s application process differs slightly, the fundamentals for financing cash flow are the same.

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