Getting a Cash Flow Loan for Your Small Business

By Lauren Ward · May 22, 2024 · 7 minute read

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Getting a Cash Flow Loan for Your Small Business

Cash flow disruptions can happen to the best-run small businesses, and it’s smart to have a financial plan to weather these times. Small business cash flow loans offer the opportunity to bridge the revenue gap when you’re waiting for invoices to be paid or for other types of funds to come in.

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.

Traditional banks typically focus on eligibility criteria when approving small businesses for loans, such as credit, time in business, and financials. These things may still be considered by a cash flow lender, but not to the same extent that they would be for a more traditional business loan.

Instead, for a cash flow loan, 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 cash flow loans, each of which comes with its own structure for receiving funds and repaying them.

Overall, small business loan rates are usually more expensive for this kind of financing than for other types of small business loans (like 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 loans include:

•   Online Loans: 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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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.

How Can a Cash Flow Loan Be Used?

Funds borrowed through a cash flow loan are typically used for ongoing operating expenses, such as:

•   Payroll

•   Inventory

•   Rent

•   Marketing

•   Insurance

Different lenders may have their own guidelines on how the funds may (or may not) be used.

How to Find a Cash Flow Loan

Once you understand the types of cash flow loans for small businesses, 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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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 Process

The biggest difference between cash flow and asset-based loans is what the lender focuses on 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 loans are likely to rely on your future revenue in some way. Oftentimes, you’re required to enroll in some type of automatic payment linked to your business bank account or point of sale system if you’re using a merchant cash advance.

Can You Get a Cash Flow Loan with Bad Credit?

Cash flow loans are primarily based on sales performance and projections. Potential lenders typically review your company’s transactions and other data, as opposed to your credit score and business history, to determine your ability to repay the loan. Each lender differs in terms of how much it weighs both 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 can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.


Get personalized small business financing quotes with SoFi's marketplace.

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 a cash flow loan 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. Your company typically needs a history of revenue in order to 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 still potentially get approved even with bad credit.


Photo credit: iStock/AsiaVision

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