When businesses need funds, securing working capital as quickly as possible is crucial. Obtaining short-term cash flow loans can be key to helping businesses through any financial shortfall.
Let’s go through the basics of cash flow lending, how to qualify for this type of financing and which lenders can provide it.
What Is Cash Flow Financing?
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 needed to fill cash flow gaps.
Cash flow lending doesn’t require collateral like asset-based loans. Instead, the funds are secured against the company’s expected revenue. Often a personal guarantee from the owner and any partners is required. This means that if your business can’t pay the loan’s balance, your personal or business assets can be used to cover the outstanding debt.
A cash flow loan is designed to be repaid quickly or be refinanced. Because commercial cash flow lending is an umbrella term for multiple funding programs, the lender requirements to qualify for funding vary. However, businesses with strong sales are likely to qualify for a cash flow loan, even if their credit score is at or below 580.
When to Use a Cash Flow Loan?
A cash flow loan can help you meet several business needs in the short term; this includes the following:
Inventory Purchases: 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. A cash flow loan also can aid businesses looking to secure enough product to fulfill a large, unexpected order.
Replacing or Fixing 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 slow 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.
Do You Need a Cash Flow Loan for Your Small Business?
Although you can’t apply for funding specifically labeled “cash flow loan,” here are examples of cash flow financing.
1. Business Line of Credit
This type of small business cash flow lending is a flexible funding solution, perfect for 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.
At Fast Capital 360, terms for a business line of credit are as follows:
Technically, a merchant cash advance (MCA) isn’t a loan. An MCA lender provides you with a set amount of cash upfront based upon future earnings. 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 24 hours.
Fast Capital 360’s terms for an MCA are the following:
You’ve decided cash flow financing is the best option for your business, but do you qualify? First, let’s look at what lenders consider when weighing your application, and then examine what type of lender is right for you.
Who Qualifies for a Cash Flow Loan?
Whether or not a borrower qualifies depends on several factors, including your debt-to-income ratio, projected revenue and operating cash flow. That said, securing small business cash flow lending is 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 debt. 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. The lower your DTI, the easier it will be to receive 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.
Also known as net cash from operating activities, operating cash flow focuses on recurring business activities. It 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 you’ll receive a high principal with lower rates.
Cash Flow Lending Sources
You have 2 major options when you’re looking for short term cash flow loans and other financing — traditional and alternative, or online lenders.
Banks and credit unions are good options for term loans or a business line of credit. Traditional lenders offer higher funding amounts, lower rates and longer repayment terms. However, with these favorable lending conditions come stricter requirements for borrowers. Banks usually want applicants with high revenues, good to excellent credit scores (670 or higher) and lengthy credit histories. They also prefer to work with borrowers who are current or previous customers. It’s difficult for some small businesses to meet these standards, particularly if they don’t generate high revenues or haven’t been in business long enough to build a credit history.
The application process can also be time-consuming, requiring detailed information and documents about your business and personal finances. The time between submitting your application and approval and funding can be several weeks or more than a month.
Alternative, or online, lenders handle their application and funding process exclusively on the Internet (this includes Fast Capital 360). These lenders will usually want the following information:
Information about your business and you (as the business owner)
Your doing-business-as (DBA) name, if applicable
Your last several bank statements
Investment information, if applicable
When you’ve collected that information, you’ll visit the lender’s website and complete the entire application within minutes. Alternative lenders are less risk-averse than conventional funders, offering 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.
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.
However, the quick turnaround time and easier access to funding mean the lender is taking on a bigger risk, so some cash flow financing can come with higher rates and a shorter repayment period.
Cash Flow Lending Frequently Asked Questions
What Are the Downsides to a Cash Flow Loan?
While a commercial cash flow loan can help you meet various business funding needs, there are potential downsides to consider before deciding whether this type of financing is right for you and your business.
Because cash flow based lending techniques take a more limited view of your business — namely, your future cash flow — and have shorter terms, they can be bigger risks for lenders. This leads to higher interest rates and fees.
Personal guarantees are a common feature of several financing options (including Small Business Administration (SBA)-backed loans). However, carefully consider whether you and/or your business partner would be able to pay off your cash flow loan’s balance in case of a default.
What Is the Alternative to a Cash Flow Loan?
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. 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. Other differences between small business cash flow lending and asset-based lending include the following:
It can take about 30 days for a lender to review an applicant’s asset-based loan request. During this time, the lender evaluates nearly every aspect of the business, including balance sheets and pledged collateral. In contrast, the underwriting process for cash flow loans helps process applications much faster. 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.
Why Is Cash Flow So Important to Lenders?
Your business’s cash flow is a big part of your business’s overall financial health, and it gives lenders a good idea of whether you’ll be able to repay any financing. Understanding your average cash flow amounts and any seasonal lulls (e.g., A garden center that doesn’t take in as much cash during the winter) helps lenders assess your risk as a borrower.
One application. Multiple loan offers.
Quickly compare loan offers from multiple lenders without impacting your credit score.