Cash Flow loans

Get to know Cash Flow Loans

Gerri Detweiler • January 26, 2021

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Cash Flow Loans Pros and Cons

Pros of Cash Flow Loans

When it comes to your business’ financing activity, few will put cash in your bank account quite as quickly as cash flow loans. And if you don’t have collateral or assets to pledge for a secured loan, you’ll appreciate the fact that you don’t need them for a cash flow loan.

While some cash flow lenders may look at your personal or business credit report, generally your credit weighs less than other factors in the approval process. With this type of financing, you simply have to prove strong revenues that assure a lender that you can easily manage repayment. 

Cons of Cash Flow Loans

On the other hand, cash flow loans can be one of the more expensive types of lending options for businesses. Cash flow lenders don’t always make it easy to compare what you’ll pay in interest and fees for a short term loan, and you can end up paying the equivalent of 11-90% in annual percentage rate fees.

Many small business owners don’t like that some cash flow loans take funds directly out of their bank, merchant processing, or Paypal account to pay back the financing, as it can impact revenue flow.

Thinking of paying off your loan or financing early? You might not save money as you would if you paid other types of loans off faster. Be sure to check the fine print to see if that’s the case.

And finally, if you haven’t been in business six months or more, you might not qualify.

What is a Cash Flow Loan?

There are a number of types of financing that could fall under the umbrella of “cash flow loan.” After all, any type of financing that is used for cash flow purposes can be considered a cash flow loan. However, the term cash flow loan often refers to financing based on the revenues of the company. Some evaluate business bank account activity, while others may look at recent revenues and advance funds against future sales.  (A merchant cash advance is based on credit and debit card sales.) You’re essentially getting an advance against expected future sales by giving the lender the rights to a predetermined amount of these receivables. 

Cash flow loans are primarily used for working capital or to take advantage of opportunities that require capital to launch. As the borrower, your credit history and scores will usually be checked, but they play less of a role than factors like revenues and how long you’ve been in business (Don’t know your business credit? Get your free business credit scores here). 

As the name indicates, the lender is most concerned with your cash flow (usually from bank statements, or perhaps a merchant account in the case of a merchant cash advance) to approve your application. Turnaround time is fast, but be aware: interest rates are likely to be higher than with other forms of financing.

Still, even with higher interest rates, business owners may find cash flow loans beneficial, especially if they’re looking for fast funding and don’t qualify for better deals on a loan.

How Do Cash Flow Loans Work?

A cash flow loan, frequently offered by online lenders, provides small business owners with access to working capital, often by leveraging expected future cash flows as collateral for the loan.

In the loan application process, cash flow lenders are generally more concerned about strong cash flow in the future than they are the borrower’s business or personal credit scores. Where asset-based lending requires you to put up capital assets as collateral against the loan, your future accounts receivables often act as collateral for this unsecured loan.

What is Asset-Based Business Lending?

If the whole thing about assets confused you, here’s a little more clarification. There are two types of loans:

• Secured
• Unsecured

Secured loans, also known as asset-based loans, require you to put up some kind of collateral (asset) against the loan. That could be real estate or equipment. Should you not be able to pay off your loan, the lender would seize the asset to cover what you owe.

Typically secured loans are for people who don’t have great credit or who don’t otherwise qualify for unsecured loans. But they can also be used to obtain better rates and terms on a loan. 

What You Need to Know About Cash Flow Loans

When it comes to financing options for your business, cash flow loans aren’t the cheapest. There are, however, some instances where they make sense, like if your credit is less than perfect, or you need a fast cash flow finance option.

But know that you will likely pay a much higher rate for access to these funds. In some cases, it may be better to wait until you build your credit and can qualify for a better rate elsewhere.

Can You Get A Cash Flow Loan With Bad Credit?

One of the biggest benefits of cash flow loans is that you absolutely can qualify for one if you have bad credit.

Maybe you have a high debt to credit ratio, or maybe your business is too new to have much credit history. Whatever the reason, you don’t want your credit situation to limit you from being able to access the capital you need to grow your business.

In this case, a cash flow loan may be a way to get the funds you need.

Which Cash Flow Loan Is Right For My Business?

There’s no one-size-fits-all solution when it comes to cash flow loans. The one you choose needs to be right for your business needs.

Are you looking for a term loan with monthly payments, or are you willing to allow payments to be taken out of your revenues each day or week? Do you want a lump sum, or would you rather have a line of credit that lets you take out funds only when you need them?

How much money do you need? It can help to analyze your cash outflow to understand your regular expenses, as well as budget for anything unusual coming up, such as hiring more staff or expanding office space.

How quickly do you need financing? Are you willing to pay a premium to get the money faster, or can you afford to wait a few weeks or months, opening you up to lower interest rates?

And finally, what kind of business cash flow loan do you qualify for? Businesses that are younger than two years will have limited options. 

What are the Requirements to Qualify for a Business Cash Flow Loan?

When it comes to working capital loans for cash flow, each company has different requirements. 

Most require at least 1-2 years in business though a few will provide financing to younger businesses with strong revenues.

Many will require a business bank account to qualify. If you are using a personal bank account, open a business bank account asap and use it going forward. 

If there is a personal credit check it may be a “soft inquiry,” which doesn’t impact your credit scores. Minimum credit score requirements are often quite flexible.

Personal and business credit checks may be used to rule out disqualifiers such as an open bankruptcy, undisclosed debt, or other problems such as tax liens or judgments. 

Check your personal and business credit before you apply. You can check both for free at Nav.com.

How To Apply For A Cash Flow Loan

While each cash flow lender may have a slightly different process for applying for a loan, you generally can expect to be asked for the following information:

• Your business tax ID (Employer Identification Number or Social Security Number if you operate as a sole proprietorship)
• Business bank statements for past several months (or access to bank account)
• Government-issued photo identification
• Details about your business, including address, industry, and revenues

Best Uses for Cash Flow Loans

If you’re wondering how you might use cash flow lending options to grow your company, you can do far more than just pay your business expenses with the funds. You can use your loan for:

• Covering a cash flow gap
• Taking advantage of opportunities for increasing revenues
• Purchasing highly-discounted inventory

Covering a Cash Flow Gap

For many companies, cash flow rises and falls with seasons. You might be flush during the winter holidays, but come summer, business may be slow. A cash flow loan can ensure you have the money to make it through to your busy season.

Also if you send clients invoices (and wait until they finally pay you) or tie up cash in inventory, you may not have the capital you need for your day-to-day expenses. Borrowing money can ensure that you can pay your employees and bills without worrying about a cash crunch.

Opportunities for Revenue

What would you do if the opportunity to buy deeply discounted equipment came up? Or a big job that requires an initial outlay of cash before you got paid? 

Having access to capital allows you to take advantage of opportunities like this. Otherwise, you might miss out on a lucrative deal.

Highly-Discounted Inventory

Typically, vendors are willing to discount your per-item cost for inventory if you place larger orders. But larger orders require more money. A cash flow loan allows you to save on bulk orders, which ultimately will increase profit margins for businesses like yours.

Alternative Options to Cash Flow Loans

Cash flow loans aren’t your only option when it comes to finding financing. If you have decent credit, look at small business loans, including SBA loans offered by banks and other lenders. You can often get a great rate and favorable terms if you qualify.

If that avenue isn’t an option, consider invoice factoring or even a business credit card. 

Both may help you quickly get the funds you need.

Nav’s Verdict: Cash Flow Loans

If you’re in need of short-term financing and your credit isn’t great, the cash flow lending route could make sense. It’s tough to fully endorse short-term business financing like merchant cash advances because of their high interest rates — but every type of financing plays an essential role for some businesses. 

Before jumping into this option, you should have a clear idea of how you plan on using the funds, and confidence that your future sales will cover the loan payments. Payments are typically directly withdrawn from your bank account, which means you must monitor balances to make sure you don’t overdraft.

As a financing tool, cash flow loans used correctly can provide much-needed working capital to create positive cash flow and invest in the future of your business.