Everything to Know About Cash Flow Loans for Small Business

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

Sometimes as a small business owner, you need cash faster than a traditional lender can approve your business loan application. In that case, you’ll want to look into cash flow loans for small business, which can put cash in your hand in just a couple of days.

Unlike asset-based loans, which require assets for collateral, cash advance loans for small business are approved solely on the basis of your company’s cash flow (past and future projections). A cash flow loan doesn’t require you to use your business assets as collateral and the approval process can be completed in as few as two to three days.

If you’re looking for a quick and simple loan for your small business, a cash flow loan might be perfect for you. We’ll examine the best cash flow loans for small businesses, so you can see if a good option exists for you.

When a Cash Flow Loan Could Benefit Your Small Business

Emergencies

No matter how well you think you’ve planned your fiscal year, challenges always crop up. You might end up scrambling to find cash to cover unexpected emergencies.

And, although every small business owner should have access to an emergency fund, sometimes we don’t always get a chance to put away as much money as we’d like—or enough saved to cover the emergency at hand. Having a cash advance loan, such as a business line of credit, available can help get you through those times without bringing your entire business operation to a halt.

Opportunities

Cash flow loans can also be a great asset to your small business when providence drops the perfect business opportunity in your lap. When opportunity presents itself, it’s important to know which resources could be at your disposal to make the most of the new business opportunity.

If you want to seize the chance to acquire a big new contract, for instance, but don’t have the means to fill the P.O., a cash flow loan could help you out. Overall, though, cash flow loans for small business are best used to bring in working capital for short-term business acquisitions that indicate a possible high return on investment.

Know the Difference Between Asset-Based Lending vs. Cash Flow-Based Lending

If neither of these situations seem like your position, a cash flow loan might not be right for you. Instead, you might need to look into an asset-based loan instead. When a business needs either a long- or short-term loan to conduct business, there are basically two options for borrowing money—asset-based and cash flow-based.

Asset lending requires business assets to secure a loan with collateral (i.e. real property, equipment, personal guarantees, blanket lien). Cash flow lending puts higher emphasis on trailing and projected cash flow for the business.

Although cash flow loans for small business certainly offer the advantage of a speedy funding process, keep in mind that there are always tradeoffs for this convenience. If you decide to pursue a cash advance loan like the ones we’ll detail below, you especially can expect to pay much higher interest rates than you would with other, longer-term loan products.

→TL;DR: (Too Long; Didn’t Read) A cash flow loan for small business will come in handy most when you need quick money to help in an an emergency, or to seize an opportunity.

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How to Tell If a Cash Flow Loan for Small Business Is Right for You

The cash advance loan application and approval process is generally pretty quick.

Unlike SBA loans, for instance, you can usually apply for cash flow loans with less-than-perfect credit, and many of the products don’t require collateral. When reviewing a request for most cash flow loan products, the lender will want to see items such as:

  • Bank transaction frequency and volume
  • Seasonal sales
  • Business expenses
  • Returning customer revenue

So, how do you know if a cash flow loan will be the best choice for your current financial needs? Let’s walk through some examples and see if any are a good fit:

  1. Are you approaching the slow period in your business?

For example, you may own a kite and ski rental shop where business booms for nine months buts slows during the other three. This year, business was off, now you find yourself short for the cash to make payroll and pay the taxes for the month. A short-term cash flow loan could help you make it through until business picks up again.

  1. Would a cash flow loan help you take advantage of inventory discounts?
  2. Or would financing help you say yes to a big job?
  3. Would financing help you take advantage of a prime opportunity for expanding at just the right moment?

If the answer is yes to any of these questions, then a cash flow loan for your small business could be the perfect solution.

But if you’re struggling just to stay afloat, using a small business loan to keep the lights on or to pay for other basic business necessities could cause you to spiral into difficult-to-pay, high-interest debt.

When weighing the pros and cons of using cash flow financing, be sure you have considered your worst case scenario. This will ensure that repayment of the loan funds can be made no matter the circumstances.

→TL;DR: You’ll want to use a cash flow loan for your small business as a short-term option—not something to get you out of longer-term hot water. Ask yourself, Am I using this to help capitalize on big ROI, or tide me over until I know I’ll be solvent again? If that doesn’t seem like you, you’ll want to explore a different option.

4 Types of Cash Advance Loans for Small Business

There are several types of cash flow loan products on the market. Each offers a variety of different rates, terms, minimums, and maximums—all of which will factor into whether or not it’s the right pick for your business.

The top four cash flow loans for small businesses include:

  • Business line of credit
  • Short-term loan
  • Invoice financing
  • Merchant cash advances

Each product has its own positives and negatives, so let’s take a look at each one:

Business Line of Credit

The business line of credit works similarly to a credit card cash advance. Your lender authorizes a set amount of funds, or maximum credit line, from which you can draw money whenever you need. Once you pay it back in full, it re-ups. This “revolving” pool of funds (hence the name revolving, since it refills) can be used for practically any business purpose.

Flexibility is the big advantage to the line of credit, since you can reuse and repay any or all of the funds whenever you need. You only pay interest on what you need, unlike a traditional business loan, which is great, too—especially if you’re keeping this type of business financing in your back pocket. Then, as long as you make repayments on time and don’t exceed the established credit limit, you won’t be charged with penalty fees or increased interest rates.

Along with being a helpful resource for cash, the business line of credit is an excellent way to establish or help rebuild your business credit history while also ensuring that you always have ready funds on hand for unexpected cash flow challenges.

Here’s what you can generally expect from a business line of credit:

  • Secured or unsecured
  • $10,000 to $1 million+ loan amounts
  • 7% to 25% interest rates
  • 6 months- to 5-year term length

Applicants with less than perfect credit scores are usually accepted. Renewability and convenience make the business line of credit appealing for small business owners; however, these do come at a cost. Interest rates tend to be higher than with other medium- and long-term funding products (though lower than business credit cards).

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Short-Term Loans

Short-term loans are very similar to traditional term loans but they have much shorter repayment schedules. These loans are most often offered between 3 and 18 months in duration and payments are made on a weekly or even daily basis.

Since it puts cash in your hand right away, there are many instances when a short-term loan is the better choice over other longer-term funding products.

Short-term loans are a great option for businesses that experience seasonal swings. If your business needs to invest heavily in supplies to prepare for the busy season, a short-term loan can help to reduce your cash-flow issues and be repaid once your busy season has started.

Or, perhaps you have a perfect opportunity for expansion. You can predict with fair certainty that investing a lump sum now will create a significant increase in business in the near future. Again, the short-term loan is a good fit for your financial situation.

The short-term loan can be an effective funding tool in many cases. It offers the advantages of easy application and processing, straightforward, no frills, consistent repayment terms, and can be used for a wide variety of business purposes.

Here’s what you can generally expect from a short-term loan:

  • Secured or unsecured
  • $2,500 to $250,000 loan amounts
  • Interest rates starting at 10%
  • 3 to 18-month term length

You’ll have an easier time qualifying for a short-term loan than other traditional term loans. A credit score of 525+ is usually acceptable. Many lenders will also look for at least nine months of business operation and $50,000 in annual revenue. Lenders are also, as expected, very interested in cash flow projections. Make sure you’ve done your due diligence when evaluating your ability to make repayment on time and in full—especially if you’re seasonal.

Invoice Financing

Invoice financing can be a good option for businesses to gain fast access to cash instead of waiting on invoices with long payment terms. Let’s say you receive a large order, but realize fulfillment will require more inventory than you currently have on hand. You need to place a large order for parts, which you must pay for up front—but can’t, because your customer was invoiced on a Net 60 basis. That’s where invoice financing will help.

A financing company will evaluate the quality of your invoices and your creditworthiness. They’ll then give you a majority percentage of your outstanding invoices—around 85%. As your customers pay their invoices, you repay the lender, and they pay you the remaining 15%, less their fee.

Invoice financing companies will charge you a standard fee for their service—often 2% or 3%—along with a “factor fee” which is based on how long it takes your customer to pay off the invoice.

Here’s what you can generally expect from invoice financing:

  • Up to 100% of invoice value
  • 8% to 30% factor fee

Although invoice financing can seem expensive when compared to other, more traditional funding products, having your cash tied up in unpaid invoices can cause serious cash flow issues. Even massive companies take advantage of invoice financing. It may actually be worth the extra expense for the benefit of restoring smooth business cash flow.

Merchant Cash Advance

If your business receives a significant number of payments through credit card sales, a merchant cash advance (MCA) could be a good option to consider. An MCA financing company gives you a set amount of cash upfront. In exchange, you repay the advance plus their fee with a percentage of your daily credit card sales.

Since you repay daily, it’s important to keep in mind that this deduction will reduce your daily cash flow. In addition, you may be required to switch your merchant credit card provider—lenders only work with specific providers in order to make the automatic debit process for repayment easier.

Here’s what you can generally expect from a merchant cash advance:

  • Daily repayment
  • $2,500 to $250,000 loan amounts
  • 1.14 to 1.18 factor fee

The qualification process for an MCA is fairly simple. The lender will be looking for at least 1 year in business, an annual revenue of at least $50,000, and a credit score of 500 or higher.

It’s important to keep in mind that the MCA is one of the most expensive financing tools on the lending market, so careful consideration should be given to other methods of funding before you decide to proceed with this product.

→TL;DR: If you want to go with a cash flow loan, your four best options are business lines of credit, short-term loans, invoice financing, and merchant cash advances. Look into each carefully—they all have different use cases. Remember that these products, meant for short-term use cases, are more expensive, and aren’t meant to patch long-term, systemic issues.

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When a Cash Flow Loan Is Best For Your Business

Cash flow loans meet a very specific set of financial needs for the small business owner:

  • The application process is quick.
  • Some can be obtained without collateral.
  • Less than perfect credit history is usually acceptable.
  • Cash flow loans are structured for speed and convenience

Just remember: Before jumping into any loan option, you should have a clear idea of how you plan to use the funds and the confidence that your future sales will cover the payments.

As a small business owner, you already know that the phrase “one size fits all” doesn’t necessarily apply to business finance. There’s room in your funding toolkit for more than one kind of funding product. Each financial situation may call for a different kind of funding.

For this reason, you shouldn’t be afraid to consider cash flow funding if its advantages seem like a good fit for your needs. With some due diligence and professional advice from a small business funding advisor, narrowing down the right choices for your next funding source can be less stressful than you might think.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

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