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How a Small Business Loan Can Free Up Cash Flow

Filed under Information Centre

One of the biggest reasons for business failures is lack of cash. If your business runs out of money, your operation halts and your business will shut down eventually.

While all businesses experience cash flow problems, it’s the small ones that are at risk of closing because of little cash and little net worth.

What is Cash Flow?

It is the money that comes in and out of your business.

The cash comes in as your customers or clients buy your products or pay for your services. They can give you the cash as soon as they receive the product or service or you can get it from collections of accounts receivable.

Meanwhile, cash goes out of your business as you pay for the operating expenses, like office rent or chattel mortgage, as well as for taxes and other accounts payable.

Cash Vs Profit

Cash is the amount in your business checking account while profit is the positive financial gain your business makes after all your expenses are deducted from total sales.

It is possible for your business to make a profit but have no cash. You can have accounts receivable, but you won’t have the cash until that amount is collected from your customers.

Unfortunately, you need cash to pay the bills, not profit.

Dealing With Cash Flow Issues

Every business owner deals with cash flow issues. When you are making little sales or your customers are not paying you with cash, you will run out of money to pay for your business expenses.

If you are just starting out, you will need more money to come in than go out. If your customers pay on credit, you’re likely to have a "cash crunch", which means that you don't have enough money to operate smoothly. Suppliers may also refuse to give you credit. The first six months is a crucial time for business cash flow. If you don't have enough cash to carry you through this time, your business is bound to fail.

Seasonal businesses, like farming and tourism, also deal with cash flow challenges more than other types of commercial entities. These businesses have a large fluctuation of cash flow at different times of the year. They can be earning a lot of cash in summertime and struggle to find customers in the winter. To survive and thrive, smart cash flow management is important.

One of the best ways to deal with cash flow issues is to get a small business loan.

Cash Flow Loan

Whether it’s because you're still waiting for the account receivables to arrive or you didn’t make enough sales because it's the low season, your cash on hand is not enough and you need to get funds somewhere to keep the business running.

A small business loan, particularly in the form of a cash flow loan, can help you cover the temporary gap in your business cash flow. Much like a working capital loan, it enables you to pay your everyday business expenses and fund your operations while you’re waiting for funds to arrive.

A cash flow loan can be secured or unsecured. In a secured plan, you would need to provide an asset as collateral for the loan. An unsecured plan, meanwhile, doesn’t require any collateral but typically has a higher interest rate and needs to be completed in a short time, like a year or less.

Qualifying for a cash flow loan can be easy as long as your business is profitable. Lenders usually focus more on your business performance than on your business credit score. Given the fact that you’re still a newbie in the industry and have yet to establish your credit profile along with your brand, this business financing option seems to be a good deal.


Aside from having an emergency cash if your business is in short supply of working capital, a cash flow loan can be used to:

  • Pay bills
  • Purchase inventory and equipment
  • Hire additional staff
  • Expand or renovate the facility
  • Set up a website or build an application
  • Pay for marketing and ads

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More Business Loan Options

Aside from cash flow loans, there are other types of financing that will help your business recover quickly from any unpleasant cash flow surprises.

1. Short-Term Loans

Short-term loans have a faster application and approval process than traditional term small business loans, sometimes on the same day you apply or within 24 hours or less. The term is also short, lasting from a few months to a year or two. Since the approval process is almost instant, lenders are not very particular about your business credit score. They're more interested in the interest they earn from the loan.

Short-term loans are notorious for their high interest rates and are best for dealing with one-off issues. Is it sensible to take out a cash flow loan to pay for your totaled delivery vehicle? Consider your cash flow crises carefully before getting one.

2. Long-Term Online Loans

Unlike fast-funding loan options, long-term online loans provided by fintechs have lower interest rates. The catch, however, is that you may need to wait for a week or two to get approved. During the waiting period, the lender typically digs deep into your personal and business credit profile to assess your creditworthiness.

Long-term online loans also differ from traditional bank loans, which could take several months to process and are seldom awarded to small and newbie businesses.

3. Invoice Financing

You can use your clients' unpaid invoices as collateral for your small business loan. The lender then provides you a cash advance (an agreed percentage of the outstanding invoices) and holds the remaining amount in reserve. You can either chase the payment from your clients' or the lender will do that for you. Once all the invoices are paid, the lender will give you the remainder of the invoice amount, minus any agreed service fees.

Invoice financing is ideal if your business operation has been hampered by slow payment of invoices. Its approval process is generally fast, making it a good option if you need money asap.

4. Business Credit Cards

You can use a business credit card to bridge the gap in your cash flow. It allows you to deal with unexpected costs while you're still waiting for more sales or invoices to get paid.

Most business credit cards provide an introductory 0% APR, which means that you won't pay any interest on new purchases and balance transfers for a limited period. This helps you fund an expensive purchase or get your debt under control by transferring an existing balance.

5. Merchant Cash Advances

An MCA can grant you immediate cash in exchange for offering a daily cut of your company’s credit card sales. While it provides relief for cash flow problems, it is best to consider this financing option as a last resort. Generally, MCAs are very expensive with fees that range from 70% to 350%.

The Best Business Loan For You

A cash flow loan provides assurance that you can keep your business afloat when you run out of money for a specific period.

With several financing options to choose from, always make sure to consider your company’s unique financial status, as well as the interest and fees in your decision. Having a good estimate of the total cost of your loan will help you manage your business finances more effectively and avoid new cash flow problems in the future.

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