Cash Flow Loans: Your Top 4 Options of 2020

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What Is a Cash Flow Loan?

Cash flow loans are small business loans that are approved solely on the basis of your company’s cash flow (past and future projections). Unlike asset-based business loans, cash flow loans don’t require you to use your business assets as collateral—and the approval process for a cash flow loan can be completed in a matter of hours.

The top four cash flow loans for small businesses are:

  1. Business lines of credit
  2. Short-term loans
  3. Invoice financing
  4. Merchant cash advances

Cash flow loans might be perfect for you if you’re looking for quick, collateral-free funding for your small business. Here, we’ll examine the details of these top four cash flow loans so that you can see if they’re a good fit for your business’s needs.

How Do Cash Flow Loans Work?

All lenders take risk into account when deciding if they should lend an individual or business money, how much they should lend, and what their terms will be.

With cash flow loans, the risk level for the lender is based on the business’s projected future cash flow. Essentially, this means the business is borrowing money based on the anticipated revenues that they plan to receive in the future.

Generally, however, past financial history and credit score are also taken into consideration by the lender.

That said, based on the way cash flow loans work, they typically:

  • Have a quick application process
  • Can be obtained without collateral
  • Can be accessed with a less-than-perfect credit history
  • Are ideal for speed and convenience

Cash Flow Lending vs. Asset-Based Lending

As we mentioned briefly above, cash flow lending differs greatly from asset-based lending—which requires business assets to secure a loan with collateral (i.e. real property, equipment, personal guarantees, blanket lien).

Cash flow lending puts a higher emphasis on money owed and projected cash flow for the business, whereas asset-based lending puts an emphasis on the real property and other assets a business owns.

That said, some other key differences between cash flow lending vs. asset-based lending are:

  • Time to fund: Cash flow loans typically offer the advantage of a speedy funding process, but there is also a tradeoff for this convenience.
  • Cost: If you decide to pursue a cash advance loan, you can expect to pay much higher interest rates.
  • Repayment: You can also expect shorter terms and a faster repayment schedule than you would with many asset-based lending products.

Top 4 Cash Flow Loan Options

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 it’s the right pick for your business.

There are pros and cons to each product, so let’s take a look at the details of each one.

1. Business Lines of Credit

Business lines of credit work much like a combination of a credit card and a term loan. Through this kind of cash flow loan, your lender authorizes a set amount of funds, or maximum credit line, from which you can draw money whenever you need.

Once you pay your debt back in full, it resets to its original amount. This “revolving” pool of funds can be used for practically any business purpose.

Flexibility is the big advantage of a business line of credit since you can reuse and repay any or all of the funds whenever you need it. You only pay interest on what you borrow, unlike a traditional business loan, which is especially appealing if you’re keeping this type of business financing in your back pocket—as many business owners do.

Then, as long as you make repayments on time and don’t exceed the established credit limit, you won’t be charged penalty fees or increased interest rates.

Business lines of credit can be unsecured or secured, which means that some will require collateral and others won’t require collateral. If you’re searching for cash flow loans specifically, then you’ll want to opt for unsecured business lines of credit.

Plus, short-term business line of credit lenders like Kabbage will provide this kind of cash flow loan based on your business’s accounting software and financial accounts.

As a result, they’ll be able to perform their automated, cash-flow-based underwriting process within a matter of hours. That means you could access a cash-flow-based business line of credit within the same day you apply.

    How to Qualify

    To qualify for a bank line of credit, you should have a credit score over 700, your business should be profitable, and you should have an established history.

    With a line of credit from an alternative lender, on the other hand, you’ll need at least a 600 to 630 credit score and one year of business history on the books.

    Best Line of Credit Lenders

    There are a variety of online lenders that offer lines of credit, including:

2. Short-Term Loans

Short-term loans are very similar to traditional business loans, but they have much shorter repayment schedules. These cash flow loans come with repayment terms of three to 18 months with weekly or daily payments.

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

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. If you can predict with fair certainty that investing a lump sum of capital now will create a significant increase in business in the near future, this cash flow loan is a good fit for your financial situation.

A short-term loan can be an effective funding tool in many cases. It offers the advantages of easy application and processing, consistent repayment terms, and can be used for a wide variety of business purposes.

    How to Qualify

    Short-term financing is fairly easy to qualify for.

    You need a minimum personal credit score of 550, however, brand-new companies might have a hard time qualifying. Your business should be at least one year old and earning $50,000 in annual revenue.

    Best Short-Term Loan Lenders

    If you’re looking for a short-term loan, consider:

3. 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 upfront—but can’t, because your customer hasn’t paid yet. That’s where invoice financing will help.

An invoice financing company will evaluate the quality of your invoices and your creditworthiness. They’ll then advance 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 fees.

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.

Be sure to note, though—some purists won’t consider invoice financing a cash flow loan because it’s technically secured by the invoice itself. Indeed, invoice financing companies like Fundbox will underwrite based on the quality of the invoice you’re trying to finance—not your business’s current cash flow.

That said, we like to consider outstanding invoices a form of projected cash flow—and because invoice financing doesn’t require any outside collateral—they’ll work almost exactly like the most straightforward cash flow loans out there.

    How to Qualify

    Since invoice financing is self-securing, you don’t need very high business credentials to qualify.

    But generally, the lender will want to see at least $100,000 in annual revenue, a 600 credit score or higher, and one year of business history on the books.

    Best Invoice Financing Lenders

    If invoice financing will help solve your business’s cash flow needs, consider:

    • Fundbox
    • BlueVine

4. Merchant Cash Advances

If your business receives a significant number of payments through credit card sales, a merchant cash advance (MCA) could be a good cash flow loan option to consider.

With an MCA, a merchant cash advance company advances you a set amount of cash upfront. In exchange, you repay the advance, plus interest, through a percentage of your daily credit and debit 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 account provider—lenders only work with specific providers in order to make the automatic debit process for repayment easier.

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

It’s important to keep in mind that MCAs are 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.

    How to Qualify

    Qualification standards for an MCA are lax.

    You’ll only need a 500 credit score and one year of business history on the books. The higher your annual revenue, the more likely you are to qualify.

    Best Merchant Cash Advance Lenders

    If an MCA is your only option for a cash flow loan, choose a reputable lender to work with.

    We recommend:

When Is a Cash Flow Loan Right for Your Business?

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 a slow period in your business?
  2. Would a cash flow loan help you take advantage of inventory discounts?
  3. Would financing help you accept a big job?
  4. 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’ve considered your worst-case scenario. This will ensure that repayment of the loan funds can be made no matter the circumstances.

Here are the two most common scenarios in which cash flow loans will be best used for your 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 the 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 have enough saved to cover the emergency at hand.

Having a cash advance loan, such as a business line of credit, 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 an opportunity presents itself, it’s important to know which resources could be at your disposal to make the most of that 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 purchase order, a cash flow loan could help you out.

Overall, though, cash flow loans for small businesses are best used to bring in working capital for short-term business acquisitions that indicate a possible high return on investment.

Pros and Cons of Cash Flow Loans

Like with any type of business funding, there are both benefits and downsides of utilizing a cash flow loan:

Pros

  • Quick application process
  • Cash flow loans can help financially cover temporary slow periods
  • You don’t always need collateral or strong credit history to qualify
  • Can allow you to take advantage of inventory discounts
  • Can provide emergency coverage when you need speedy cash flow

Cons

  • Cash flow loans often have high interest rates
  • Typically have short repayment terms with a frequent payment schedule
  • A cash flow loan can lead to high interest debt if not paid off on time

Frequently Asked Questions

The Bottom Line

At the end of the day, before jumping into any cash flow 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 the 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.

See Your Business Loan Options
Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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