Table of Contents
- What Is a Cash Flow Loan?
- How Do Cash Flow Loans Work?
- When to Consider a Small Business Cash Flow Loan
- How to Find a Cash Flow Loan
- Questions to Ask Before Taking Out a Cash Flow Loan
- What Is Asset-Based Business Lending?
- Cash Flow vs Asset-Based Loans
- Can You Get a Cash Flow Loan with Bad Credit?
- FAQ
Cash flow disruptions can happen to the best-run small businesses, so it’s smart to have a financial plan to weather these times. Small business cash flow loans are a way to bridge the revenue gap when you’re waiting for invoices to be paid or for other types of funds to come in.
Key Points
• Cash flow loans allow businesses to borrow against future revenue and can be helpful for those with irregular or seasonal revenue cycles.
• These loans are based on financial data and revenue projections rather than credit history or collateral.
• Types of cash flow loans include term loans, lines of credit, merchant cash advances, and invoice factoring.
• Revenue data is more important than credit history when applying for a cash flow loan.
• Cash flow loans generally don’t require collateral beyond revenue projections used to calculate repayment.
What Is a Cash Flow Loan?
A cash flow loan is a type of financing that allows you to borrow against future revenue. It can be structured in a number of different ways to suit your needs and your business model.
When approving small businesses for loans, traditional banks typically focus on eligibility criteria such as credit, time in business, and financials. These things may still be considered by funders offering cash flow lending to small businesses, but not to the same extent that they would be for a more traditional business loan.
Instead, with cash flow loans, lenders typically judge your ability to repay the loan based on revenue projections. Depending on the financing structure, your loan payments could be based on a percentage of future credit card transactions or your unpaid invoices. Alternatively, you might apply for a business line of credit to help with cash flow or a small business loan with a fixed repayment term.
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How Do Cash Flow Loans Work?
There are several types of loans for cash flow, each of which comes with its own structure for receiving funds and repaying them.
Overall, small business loan rates are usually more expensive for cash flow financing than for other types of small business loans (such as SBA loans). But the eligibility requirements are usually more relaxed.
Different Types of Cash Flow Loans
Some of the most common types of cash flow lending for businesses are:
• Online loan: It’s possible to find online business loans for small businesses that offer help with cash flow. With these loans, typically you’ll receive a lump sum and then make payments on a regular basis. You can find online loans with terms lasting just a few months up to several years, depending on the lender.
• Merchant cash advance: A merchant cash advance lets businesses borrow a sum of cash based on projected credit card transactions. You’re charged a factor rate instead of interest, which is combined with the amount you borrowed to calculate your total debt. Payments are then automatically deducted as a percentage of your credit card sales. In some cases, payments can also be automatically deducted from a business bank account on a fixed schedule.
• Invoice factoring: Invoice factoring advances a portion of a company’s unpaid client invoices. Depending on your industry, you might receive anywhere up to 90% of the outstanding invoice amounts. In many cases, the factoring company then takes over the collection process. Once the invoices are paid, you receive the remaining balances, minus the lender’s fees.
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Key Features of Cash Flow Loans
Despite their differences, loans for cash flow are similar in several ways:
• Lenders focus less on credit history.
• Application focuses on financial data.
• Processing time varies by lender; can be fast.
• Collateral is generally not needed.
• Repayment relies on future revenue.
• Rate can be more expensive than other loans.
When to Consider a Small Business Cash Flow Loan
Revenue isn’t always steady, even when a business is thriving. Some dips are foreseeable, such as seasonal business cycles. But there are also sudden opportunities or infrastructure problems that may crop up. In these situations, the speed, availability, and flexibility of cash flow loans can be appealing, even if their relatively high APRs are not.
Seasonal or Irregular Revenue Cycles
Businesses with seasonal ups and downs — such as retailers specializing in Christmas decor, Halloween costumes, or warm-weather sporting goods — can typically plan ahead in order to get through the slow times. But delayed or disrupted revenues may call for a cash flow loan to help a business owner get through the lean season.
Business Growth and Expansion
Needing to expand can be an exciting and inspiring stage in building your business. But if the need is sudden or larger than expected, you may require extra capital beyond what you’ve planned for. A small business cash flow loan can be a speedy solution in such cases.
How to Find a Cash Flow Loan
Once you understand the types of cash flow lending for small businesses, you can narrow down your choices to the ones that make sense for your business model.
For instance, merchant cash advances are designed for companies with regular credit or debit card transactions.
Invoice factoring, on the other hand, is suited for companies that regularly invoice customers.
A cash flow loan or line of credit usually suits a broad range of business types. You can use a lender platform to access multiple loan offers and find the one that suits your company.
Also, you may want to consider exploring other funding opportunities, such as small business grants, which don’t have to be repaid.
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Questions to Ask Before Taking Out a Cash Flow Loan
As with any loan, it’s wise to start by asking yourself some basic questions.
• Exactly how much money do you need?
• What repayment amounts and financing terms could your business sustain, if offered?
• Is a cash flow loan the best option for you? If so, what type?
• What other funding options should your company explore?
Ask lenders some questions, too, such as:
• What are the loan terms and criteria?
• Are there penalties for early repayment?
• Are there rules limiting what the loan proceeds could be used for?
What Is Asset-Based Business Lending?
Asset-based lending is any type of financing that uses property as collateral to secure the loan. Examples of the kinds of assets that might be used include equipment, inventory, invoices, and real estate.
Because the loan is backed by collateral, interest rates and terms are typically more favorable. Small businesses struggling with credit or revenue may also have an easier time qualifying for this type of financing because it’s less risky to the lender. If you aren’t able to pay back the loan, the lender is able to seize your collateral.
Cash Flow vs Asset-Based Loans
Although asset-based loans may be used for some of the same purposes as cash flow loans, they’re not the same. This table helps summarize some of the similarities and differences.
| Feature | Cash Flow Loan | Asset-Based Loan |
|---|---|---|
| Loan Process | Application focuses on financial data | Application focuses on value of assets |
| Processing Time | Varies by lender | Varies by lender |
| Loan Collateral | Generally not required | Required |
| Repayment Schedule | Relies on future revenue | Generally fixed |
Loan Application
The biggest difference between cash flow loans and asset-based loans is the lender’s focus when reviewing your application (cash flow versus assets that will be used as collateral).
For both types of financing, you typically don’t have to worry about meeting the definition of a small business the way you would with an SBA loan. Lenders can create their own eligibility criteria rather than adhering to SBA requirements.
Processing Time for the Loan
Processing time varies by lender, but both types of loans typically feature fast funding times. This is especially true if you apply with an online lender.
Collateral for the Loan
Cash flow loans generally don’t require collateral beyond the projections for the revenue that will be used to repay the loan.
Asset-based loans, on the other hand, require some type of collateral to secure the loan. These assets could be in the form of inventory, equipment, or real estate.
Repayment of the Loan
Repayment depends on the structure of the loan. Asset-based loans usually have a fixed repayment schedule, while cash flow loan payments are likely to rely on your future revenue in some way. Often, you’re required to enroll in some type of automatic payment linked to your business bank account or to a point-of-sale system if you’re repaying a merchant cash advance.
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Can You Get a Cash Flow Loan with Bad Credit?
Cash flow loans are primarily based on sales performance and projections, as opposed to credit score and business history. Potential lenders typically review your company’s transactions and other data to determine your ability to repay the loan. Each lender differs in how much it weighs business and personal credit scores.
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The Takeaway
If your company has a good revenue history, a cash flow loan could be an option when your business needs help covering operating expenses. As you weigh the pros and cons, you can search for small business loan offers to see what is available.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What are the different kinds of cash flow loans?
Cash flow loans may include term loans, lines of credit, merchant cash advances, and invoice factoring. Each one has its own pros and cons, as well as its distinct requirements based on how your business brings in income.
In what situations is a cash flow loan the best option?
A cash flow loan is ideal for businesses that don’t qualify for traditional bank or SBA loans. But interest rates and fees for cash flow loans are typically higher, and this type of financing doesn’t always help build your business credit history. It’s important to explore all of your options and feel comfortable about your company’s ability to repay the loan.
Who qualifies for a cash flow loan?
Compared to a startup, a company with a history of revenue is better positioned to get approved for a cash flow loan for small businesses. A history of revenue can demonstrate your ability to repay the loan based on future sales.
Can I get a cash flow loan with bad credit?
Credit history is weighed less heavily than your revenue data when you’re applying for a cash flow loan. That doesn’t mean your business and personal credit scores aren’t reviewed at all, but it does mean you could potentially get approved even with bad credit.
How fast can I get approved for a cash flow loan?
Although processing time varies by lender, some online sources offer approval within hours. It’s possible for approved borrowers to get the funds within a day or two.
Photo credit: iStock/AsiaVision
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