What is a Small Business Cash Flow Loan?
Are you running a small business that has yet to make large profits? Do you need to make payroll tomorrow but your customers are paying you next week? Get a cash flow loan.
A cash flow loan is a type of business financing that covers working capital needs. It aids your business’s cash flow during the trying periods of temporary underfunding or emergency expenses and unforeseen business opportunities. Its purpose is not to build your trade or to help your dying business stay afloat, but to ensure that you have enough money left for operations and profit targets after paying both daily and unexpected expenses.
While most types of business loans, including equipment financing and chattel mortgage, are secured against the asset to be purchased, a cash flow loan is generally unsecured. You will pay back the money you borrowed along with its interest with the incoming cash flows of your business. Thus, even though you’re short of funds and in need of additional working capital, your business has to be generally healthy and financially stable to qualify.
How Cash Flow Loan Works
A cash flow loan is ideal if you run a small business or startup that is temporarily underfunded and in need of immediate finances but is expecting to have funds coming in soon. It is a great financing alternative if you are not qualified for a secured business loan because of:
- Lack of, insufficient, or bad credit score
- No established record of profitability
- No significant assets to back a loan
When you apply for a cash flow loan, your lender gives more importance to your business’s cash flow than your credit history. They assess your capacity to pay based on the cash flow generation capacity of your business. This is affected by several factors, including:
- Bank statements and/or credit card processing transactions
- Frequency and volume of transactions
- Seasonal sales
- Returning customer revenue
- Customer reviews
Like all unsecured loans, the interest of your cash flow loan is higher than traditional business loans to compensate for the high risk of loan default. The term is often shorter than conventional loans, usually within six months to a year and a half. Additionally, the origination fee or the upfront fee for the processing of your loan application is high.
The repayment is usually a fixed amount over a predetermined loan term. However, in some agreements, the lender gets a percentage of the sales you make until you pay off the loan.
Benefits of Cash Flow Financing
While not all small businesses are advised to seek cash flow financing, those who qualify can make use of its advantages to:
1. Pay for emergency expenses
Despite carefully planning your business transactions and cash flow needs, there will come a time when untoward incidences occur and threaten to hamper your operations. These include large amounts of bounced checks from customers that cause funding gap, worker injury, tax obligations, lawsuit and physical emergencies like typhoons, flooding and fire.
2. Fund new business opportunities and expansion
When you’re getting lots of orders for your products or services, you need the means to support the demand. For instance, if you run a small cookie business and suddenly get an offer to become the cookie supplier for a leading patisserie chain, you would need to buy more ingredients and baking equipment. You might also need to hire more people and buy a new delivery van to use. A cash flow loan could provide you with additional funds for this venture.
3. Make it through the slow period
A slow period in your business is when there are not enough new customers coming in to buy your products or seek your services. If you run a laser skin treatment centre, for example, you might experience a slow time during the winter season when most people would rather be wrapped in warm quilts and ponchos than flaunt their flawless skin in skimpy clothes. With fewer customers coming in and paying for your service, you make less money. Unfortunately, you still need to pay your staff and maintain your equipment. You might even need new ads or buy freebies to promote your business. A cash flow financing can cover all these necessary expenses.
4. Take advantage of trade discounts
If you are a product reseller and want to take advantage of trade discounts offered by suppliers, you can borrow money to purchase large orders. Not only will you get more savings on your purchases and make more profit after reselling them, you also won’t need to use your working capital.
5. Support marketing and advertising initiatives
You can dedicate the money from your cash flow loan to your business’ marketing and advertising efforts. This will help your business reach more customers and attract sales, eventually increasing your business revenue and profits in the process.
If you find yourself in need of immediate funds to support your business operations and you are assured of money coming in soon, cash flow financing is right for you.
Positive Lending Solutions offers cash flow loan for business owners. Our financing experts can help your business improve and operate exactly as you desire. Request a Quick Quote or call us on 1300 722 210.