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Cash Flow Financing: How Cash Flow Loans Work and Where to Find Them
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Cash flow financing is available in several forms to business owners who may need to obtain funding based on their revenue, rather than their credit score or collateral. Because of the flexible requirements, cash flow financing — which can include short-term loans, lines of credit and merchant cash advances — may be easier to get for some business owners than other forms of financing, like traditional bank loans. However, cash flow loans can come at a high cost. If you pursue this type of financing, you should proceed with caution.
- How cash flow financing works
- Types of cash flow financing
- Where to find cash flow loans
- Cash flow financing: Pros and cons for borrowers
- What to consider before taking out cash flow financing
How cash flow financing works
Alternative business lenders issue cash flow loans based on a business’s cash flow projections and past performance. Lenders analyze the following — among other things — to determine a business’s eligibility for funding:
- Transaction frequency
- Seasonal sales
- Business expenses
- Returning customer revenue
Cash flow loans differ from bank loans, which typically require information regarding credit history, collateral and profit, in addition to cash flow. Banks generally measure the overall risk of a business when approving business loans, while alternative cash flow lenders concentrate on income.
Cash flow financing is typically unsecured, meaning no specific collateral backs the loan. In some cases, nonbank lenders may place a general lien on all business assets until the loan is repaid, giving the lender the ability to seize those assets if the business defaults on payments. However, the lien would not be dependent on the value of a single asset.
How cash flow financing expanded
Cash flow financing was a byproduct of the financial crisis in 2008. Banks reduced business lending, leaving many small businesses without stable funding sources.
These lenders typically have an automated underwriting process that is faster than bank processes. But in exchange for fast funding with fewer requirements, borrowers may pay higher interest rates and fees.
Who is best suited for cash flow financing?
Cash flow loans may be an attractive option for business owners with bad credit, since credit history isn’t usually a determining factor in approval. There may not be many choices outside of cash flow financing that an applicant with bad credit could consider.
In addition to cash flow, cash flow financing lenders would likely want to see some revenue and sales history. Newer businesses may not be eligible for cash flow financing unless there are valuable assets the lender could claim as collateral to secure a loan.
Types of cash flow financing
Cash flow financing comes in several forms. Here are a few types of cash flow financing that you could expect to see.
Short-term business loans usually come with small amounts, short repayment periods (between three and 18 months) and higher interest rates than longer-term loans. Applicants typically need to submit minimal paperwork, and could be approved with bad credit history. Most short-term lenders consider a business’s cash flow projections and revenue history more heavily than other factors.
Lines of credit
Unsecured business lines of credit give borrowers access to funds on an as-needed basis. Business owners can draw funds from a set amount and only pay fees and interest on what’s borrowed. Lenders wouldn’t ask for collateral for an unsecured line of credit, though a minimum amount of time in business or sales volume could be required. Positive cash flow would also likely be part of the eligibility criteria.
Merchant cash advances
Merchant cash advances provide a lump sum of money in exchange for a portion of the business’s future receivables. Merchant cash advance providers typically take a portion of each credit card transaction until the advance is repaid. The higher your sales volume, the faster you’d pay back the full amount. Merchant cash advances typically have low credit requirements and offer fast time to funding, although the cost could be much higher than other financing products, such as long-term loans.
Where to find cash flow loans
Alternative lenders offer many types of cash flow financing. Here are a few options you could consider for your business.
|Lender||Financing Products||Amount||Interest Rates||Minimum Revenue|
||$5,000 to $400,000||Factor rates between 1.35 and 1.5||$100,000 in annual sales|
||Up to $250,000||As low as 4.80%||$10,000 in monthly revenue|
||$5,000 to $250,000||
||$250,000 in annual revenue|
*Based on loans originated in the half-year ending March 31, 2022.
Reliant Funding offers merchant cash advances between $5,000 and $400,000 with repayment terms between 3 and 15 months.
The online lender uses factor rates to calculate interest. These are written as decimal figures rather than percentages. You would multiply the factor rate by your loan amount to determine the total amount you would need to repay. Reliant Funding’s factor rates for merchant cash advances could be between 1.35 and 1.5. As an example, if you have a $10,000 merchant cash advance with a factor rate of 1.35, you would ultimately repay $13,500.
Eligible borrowers must have $100,000 in annual sales and six months in business. Reliant Funding doesn’t require collateral or a minimum credit score from most applicants. If approved, you could receive funding within 24 hours.
BlueVine provides several financing options, including short-term loans and lines of credit. Loans and lines of credit are available for up to $250,000 with repayment terms of 6 or 12 months. Interest rates may be as low as 4.80%.
To qualify, you would need $10,000 in monthly revenue, six months in business and a personal credit score of at least 625. You could be approved in minutes and receive funds the same day. BlueVine requires a general lien on business assets.
OnDeck offers unsecured short-term loans and lines of credit. Loans are available between $5,000 and $250,000 with terms between 3 and 24 months. APRs start at 29.90% APR, though the weighted average APR is 62.1%. Lines of credit are offered between $6,000 and $100,000 with 12-month terms. APRs for lines of credit start at 29.90% (the weighted average APR is 48.9%).
Borrowers need $250,000 in annual revenue, three years in business and a personal credit score of at least 600. OnDeck also requires a general lien on business assets.
Cash flow financing: Pros and cons for borrowers
Take these potential advantages and disadvantages into account before applying for cash flow financing. Cash flow loans could be attractive for a number of reasons, but they could also do more harm than good.
Accessibility: Eligibility for cash flow loans primarily depends on revenue forecasting, meaning factors such as poor credit history or a lack of extended time in business won’t be crucial. Business owners who have trouble qualifying for traditional forms of financing may be able to access cash flow loans.
No collateral: Cash flow loans typically don’t need to be secured with specific assets as collateral. This would be beneficial for businesses without valuable assets to offer lenders.
Fast approval: Because of the lack of underwriting, lenders are often able to quickly fund cash flow loans, sometimes in a matter of hours or days. The application process for a cash flow loan can be simpler than that of traditional business financing.
Flexible repayment: Some forms of cash flow financing require payment as a percentage of revenue or sales, rather than a fixed amount. Payments may be lower when business is slow and higher when sales volume is up. Seasonal businesses may benefit from this repayment structure.
High cost: Lenders take on more risk when eligibility requirements and underwriting are minimal, resulting in high interest rates for borrowers. High rates combined with fast or unpredictable repayment terms make cash flow loans expensive products that may be difficult to pay off.
Cash flow impact: Lenders generally deduct payments automatically from sales or a business bank account, so you may not be able to budget for automatic payments or adjust spending elsewhere. Loan payments could interrupt your business’s cash flow.
Risk of revenue changes: If you make a mistake in your revenue projections, or if sales aren’t as high as planned, you may have trouble repaying a cash flow loan. You would still be on the hook for the debt, but you may not have enough income to cover payments.
Early repayment not common: Lenders generally don’t allow early repayment of certain cash flow loans — merchant cash advances are a typical example. You may face a fee if you pay more than your regular payment amount.
What to consider before taking out cash flow financing
Why you’re seeking financing
Before applying for a cash flow loan, ask yourself why your business needs the money. If you can point to a specific revenue growth opportunity that cash flow financing would support, then it may be worthwhile. However, if you’re short on cash and aren’t sure why, you may want to avoid borrowing money at a high cost. You would risk putting your business and personal financing at risk if you can’t pinpoint why the business funds are running low.
Other options at different costs
Alternative financing solutions may offer the same funding you need at a lower cost.
- Secured business loans: If you have certain business assets to offer as collateral, secured business loans could provide lower interest rates than unsecured cash flow financing.
- Secured business lines of credit: Business lines of credit can also be secured, although you may need good credit to qualify.
- SBA loans: You may be eligible for SBA loans if you’ve exhausted all financing options for your business. However, SBA loans usually require strong personal credit and collateral.
- Business credit cards: Business credit cards provide access to capital on an as-needed basis and could include perks like cash back or travel rewards.
Whether your business is reactive or proactive
Businesses that are reactive to cash flow management (borrowing money to cover a shortage) rather than proactive (planning ahead with an emergency fund) often resort to pricey cash flow loans. It’s important for businesses to project different cash flow scenarios.