The term "cash flow loan" may be used to describe two different types of financing:
• A loans for cash flow purposes.
• A loan that's collateralized or repaid by cash flows.
Loans for cash flow purposes help businesses manage their inflows and outflows of cash and prevent cash shortfalls.
Loans that are backed or repaid by cash flows give businesses access to capital they need and otherwise might not be able to get.
Cash flow loans typically are short-term financing. Terms of six, nine, or twelve months are more common than terms of longer than one year.
A short-term business loan for cash-flow purposes might require periodic payments, but more likely the entire loan, principal and interest, will be repayable at the end of the term.
Cash flow statement
A profit-and-loss statement shows a company's revenues, expenses, and net income or loss. A balance sheet shows its assets, liabilities, and owner's equity.
Similarly, a cash flow statement shows a company's cash inflows, cash outflows, and available cash.
Examples of inflows include cash received from sales of products or services, loans or lines of credit, and sales of business assets.
Examples of outflows include cash used for operating expenses, loan payments, and purchases of business assets.
A cash flow statement typically is divided into three sections for operations, investments, and financing activities.
A cash flow statement can show a past time period, like a just-ended month or quarter, or a projection for a future time period, like the next year. Projections help management anticipate cash needs or shortfalls.
A cash flow system that works well ensures that the business has enough cash when it's needed to pay for supplies, salaries, and so on.
A business that doesn't have enough cash to operate can be in trouble even if its sales are healthy and outlook promising.
Pros and cons
A cash flow loan can be used as a source of funds to purchase inventory, equipment or materials, pay business expenses, refinance other loans, or as working capital for general business purposes.
A cash flow loan can help a business manage through temporary rough times when cash flows might be disrupted, perhaps because customers haven't yet paid for products or services they've received. Rather than panic if a cash shortfall is imminent, the owner can use the loan to tide the business over, paying bills that are due on time until more cash comes in.
Without a cash flow loan, a business might have to cut costs, layoff employees, or scramble to get other financing if not enough cash is available. Managing a growing business with only cash and no source of financing can be difficult.
Cash flow loans tend to have high interest rates. Business owners should shop around and compare the rates and terms different lenders offer.
It's not easy for small businesses to qualify for loans. Whether a lender will say yes depends on how much money the owner wants to borrow and why, the business's track record and creditworthiness, and the owner's personal credit history, credit score, management experience, and investment in his or her business.