If you’re an entrepreneur, you’re well aware that cash flow is the lifeblood of your business, and that positive cash flow is necessary to keep your business thriving. Cash flow is the total amount of money that flows in and out of an enterprise — the revenue and liabilities in the course of a month. It’s different from net revenue. Your cash flow will vary according to seasonal and business cycle factors. To help stabilize cash flow, business owners often seek out financing options in the form of loans. Here’s a rundown of some key things to know about cash flow loans.
Cash flow loans happen when small and mid-sized companies receive business loans based on past cash flow and projected revenues. Lenders take a look at bank statements and credit card transactions to determine total inbound cash flow. If approved, a business may receive up to 200% of its total deposits. Most cash flow loans are unsecured and don’t require a high credit score or collateral.
Lenders usually require a credit application, but that factor is not the most important one driving their decisions (although they do take into account disqualifying incidents such as bankruptcy and defaults). Revenue is more crucial. Lenders evaluate a business’s revenue by examining bank account and credit card statements. Usually, the last 3-6 months are the focus. Then, the lender calculates the amount that they think the company will be able to pay back comfortably. Finally, the business owner receives an offer and a loan.
Companies that have minor credit issues or lack profitability are good candidates for receiving cash flow loans. Financing is fast (usually between 1-5 days), and the application process is simple. Collateral is not needed (though there’s a lien on the business), and companies only need to have been in business for six months.
The disadvantages of cash flow loans have to do with rates and terms. Financing is expensive, due to the increased level of risk. That’s reflected in the loan in the form of higher fees and interest rates. Terms are generally shorter, also.
You can use cash flow loans for payroll, working capital, expansion, advertising, tax obligations, and emergency expenses. The flexibility is a distinct advantage.
Applying for a cash flow loan requires awareness of the pros and cons of this type of financing. Consider these factors when making your decision.