Whether due to slow-paying customers, inadequate cash reserves, too much debt, or another factor, cash flow problems are a common frustration for businesses of every size.
Having healthy cash flow is vital to keep your operation running like clockwork, and we understand that finding the right finance for your business can be overwhelming. There are so many choices and considerations to keep in mind, it’s easy to become confused.
For many businesses, taking out a cash flow loan can provide much-needed financial breathing space during leaner months and/or enable them to invest in key areas of growth that will improve their operation. Read on for more information on cash flow loans.
What is a cash flow loan?
A cash flow loan is a short-term commercial loan that can provide financial support through challenging periods in business. In simple terms, you borrow the money you need, and pay it back in fixed instalments over a short period of time.
Every business needs a healthy cash flow, but because of cash flow issues, many small business owners aren’t able to pay vendors, loans, bills, or even employees. This can prevent businesses from realising their ambitions and can, in extreme circumstances, force them to close down.
A cash flow loan is there to bridge the monetary gap left by late payments and other unforeseen circumstances.
How do cash flow loans work?
A cashflow loan is unsecured which means lenders are more interested in your past and future cashflow than your asset value. You will usually pay back the loan in full between 3 and 12 months, and as interest rates are fixed the regular repayment amount will not change.
Cash flow finance is an unsecured loan, which means lenders don’t fixate on your asset value, they’re more interested in your past and future cash flow. So, your business would borrow based on estimated future revenues.
For example, you have invoiced a customer, but they have missed their payment deadline. You are chasing the payment, but they are not responding or are telling you they will need more time to pay. While they may have nothing but good intentions, you need to pay your own invoices, bills, rent, and employees.
You could try not meeting your own financial obligations, or you could take out a cash flow loan to cover your costs until you are in a more comfortable financial position.
It is important to note that a cash flow loan is not a long term solution for cash flow issues. If you are experiencing ongoing cash flow problems, you may need to look at alternative ways to help manage it.
Examples of other types of cash flow finance include a revolving credit facility (a type of business credit line where you can access a pre-agreed maximum amount of funds whenever you need them) and invoice finance which helps your business get up to 95% of the value of an unpaid invoice from a lender when you need it – you then pay the lender back when your invoice is paid.
What can cash flow loans be used for?
While other types of commercial loan have to be used to cover specific costs, e.g., tax bills or insurance payments, a cash flow loan offers more flexibility.
A business cash flow loan can be used to pay for whatever you need it to in your day to day operation. This might include utility bills, wages, rent, stock, or other materials that will keep your business running in the leaner months.
This type of loan is particularly useful for seasonal businesses to help them maintain a consistent cash flow throughout the year.
Cash flow loans can also be used for:
- business renovation or expansion
- business equipment
- marketing your business (e.g. building a website)
- paying rent and bills.
What are the advantages and disadvantages of cash flow loans?
Just like any type of commercial finance, there are advantages and disadvantages of cash flow loans. You should always research every suitable financing option before signing on the dotted line.
Advantages of cash flow loans
- The loan is unsecured making it a quicker form of finance to secure, and you won’t have to use your property or commercial assets as collateral.
- It’s a short-term loan so you won’t be committing to an agreement that lasts for several years.
- Boosts your cashflow during slower periods of trading.
- While your business’ credit history will be assessed when applying for a cash flow loan, lenders tend to focus more on your business’ current financial health and future prospects rather than a bad credit history.
- In some cases, if you repay your cash flow loan in a short amount of time, your credit score may improve.
Disadvantages of cash flow loans
- Because the loan is unsecured, it attracts higher interest rates.
- Some cash flow lenders may require automatic payments to be set up which could become an issue if you cannot afford to pay the same amount at the same time each month.
- Directors will need to provide a personal guarantee with most lenders as the loan is unsecured. By providing a personal guarantee, you’re agreeing to pay the loan from personal funds if your business cannot make the repayments for some reason.
Interested in a cashflow loan for your business?
We can help businesses to by obtaining the best funding options and facilities, quickly and efficiently, whilst ensuring your short-term goals and long-term ambitions are considered in your financial strategy.
If you are interested in a cash flow loan, get in touch with us today. We will assess your business’ individual circumstances and work with you to decide if a cash flow loan or another finance solution would be the right choice.
Complete the form below to send us an enquiry.