Cash flow loans are an effective mode of financing that can keep your business afloat. Whether your business is going through a market downturn or unexpected expenses occur, a cash flow loan can provide the cash injection you need to fill the gap in business finances. According to a recent survey, 37% of Australian SMEs have found it more challenging to access funding since the start of the Covid-19 pandemic, with 26% saying they had been rejected for finance. Unlike traditional bank loans, cash flow loans are much easier to qualify for. In this guide, we’ll explore how to get a cash flow loan, more specifically the tips, tricks and what to look for.
What is a Cash Flow Loan?
Cash flow loans are a type of unsecured financing used by businesses in day-to-day operations. However, note that cash flow loans are not the same as traditional bank loans. Businesses are required to give business or personal assets as collateral in a traditional bank loan. Their decision to approve a loan depends on a variety of factors. These include your credit history, the value of the collateral you have to offer, the current profit and cash flow of your business and your debt-to-income ratio.
Unlike traditional bank loans, the lender will base their decision on your past performance and future cash flow projections. The factors taken into account in this process include expenses, accounts receivable, returning customer revenue, customer reviews, and historical performance. Another significant benefit of cash flow loans for short term problems is that approval decisions have a fast turnaround. The formal time for approval of regular loans is generally four to six weeks. In contrast, cash flow loans can be granted within 24 hours and funds transferred immediately upon approval.
When is a Cash Flow Loan Beneficial?
A cash flow loan can be useful if you:
- your business is growing rapidly or developing a new offering, and you don’t want to damage working capital
- you need to meet a sudden upsurge in demand
- hefty unexpected costs have arisen
- need to upgrade equipment
- want to negotiate bulk purchase discounts with suppliers
- need to cover cash flow gaps caused by late or extended payment terms
- need help taking on the costs of hiring additional employees
Tips, Tricks and What to Look For
TIP #1: It is important to be aware that there is a trade-off of a cash flow loan not requiring collateral. Specifically, the funds are secured with a personal guarantee from the owner. Meaning that if your business was unable to repay the loan, you will be personally liable for the remaining balance.
TIP #2: If you don’t already have a business plan, create one today. Banks will only want to lend money to a business that runs a profitable operation. Lenders will want to know the trajectory of your business and how prepared and equipped the business is for any unforeseen events. Ultimately, anyone interested in giving money to your business will want to know it’s in good hands and viable long-term.
TIP#3: Prepare a cash flow projection. A cash flow projection can forecast as little as a month or a quarter of a calendar year but banks generally like to see a 12-month forecast. Having access to finance can assist your business in filing gaps – but you will need to prove that you can make repayments.
TIP#4: Preparation. For your first meeting with a lender, you will want to bring the right documents. This will demonstrate that you have a strong understanding of your business. Undoubtedly, lenders will want to know why you need a cash injection. You should be clear about the purpose of acquiring a cash flow loan and what you can afford. Remember to be realistic.
What to Look For
There are pros and cons of each type of cash flow loan. Therefore, it is important to look for a cash flow loan that is most suitable for your company. Here are a few types of cash flow loans:
- Business Line of Credit: in this type of loan the lender will allow you access to a pool of funds, up to a limit. As you make repyaments and clear the balance, the funds become available again. You can withdraw funds when needed and you only have to pay interest on that amount, not the total amount available. However, note that a line of credit can sometimes require realestate as collateral.
- Merchant Cash Advance: a merchant cash advance allows your to receive a cash advance based on the value of your future credit and debit card sales. The lender advances you a sum of money which you repay with a percentage of your future merchant sales (credit card and EFTPOS sales).
- Trade Finance: utilised to support import/export and domestic trade transactions. Trade Finance can benefit companies that struggle with capital being tied up in the supply chain for extended periods.
- Invoice Finance: if you need a loan to fill gaps due to extended payment terms or late payments, invoice finance loans can provide efficident access to capital. Instead of waiting 30+ days for your customer to pay, you can get a cash advance of up to 95% of the invoice value. However, a significant drawback is that the amount you can borrow is limited to the value of your accounts receivable.
Is a Cash Flow Loan Right for Your Business?
Before opting for a cash flow loan, you want to make sure this is the right avenue for your business. Therefore, you should ask yourself the following questions:
- Do you need cash fast?
- Is this for a short-term opportunity or purpose?
- Do you lack collateral for a traditional bank loan?
- Do you need a one-off lump sum?
If you answered yes to all of the above questions, then a cash flow loan may be just what your business needs.
Keeping on top of cash flow could be the difference between a thriving business and one on the brink of closing. Having a backup plan such as a cash flow loan will help meet day-to-day obligations until you get paid. It is important to note that cash flow loans are not a long term solution for cash flow issues. Check out our previous blog on Understanding SME’s Cash Flow Problem.
Here at BUSINESSNAV, we are experts in assisting businesses in unlocking their revenue potential by navigating their cash flow to safety, security, and sustainability.