Cash flow lending definition and how it works

23 Jul 2020

Healthy cash flow – the amount of cash and equivalents that flow in and out of a business – is the lifeblood of most SMEs. Yet dealing with cash flow issues as a startup or small business can be challenging and lack of cash is one of the top reasons companies fail.

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What is a cash flow loan?

A cash flow loan is a type of business finance – usually secured – that is designed to help companies manage their cash flow in the short term. The money can be used for a variety of purposes depending on the needs of the business. 

Cash flow loans aren’t a long-term solution for cash flow management, but a resource for injecting cash quickly when you need it. 

The loan is typically repaid by your projected cash flow, so essentially you're borrowing from revenue that you expect to receive in the near future. In order to mitigate risk, the lender will usually require a personal guarantee from the company’s director/s. 

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Why might a business need cash flow finance?

Cash flow loans are for businesses that need to boost their cash flow. A cash flow loan recipient might require emergency cash, capital to tide them over during a seasonal dip, or temporary finance to cover the cost of business-critical equipment or inventory. 

Companies also use cash flow finance when they are growing to hire additional staff, expand or renovate their workspace or invest in their website, etc. Short-term loans can also be used to cover bills when trading is quiet but business costs remain consistent.

For seasonal businesses, invoice finance might be a smarter solution. Invoice finance is a way of obtaining finance based on what your customers owe to your business. 

If your business has been adversely affected by the coronavirus pandemic, you might be eligible for a loan through the Coronavirus Business Interruption Loan Scheme (CBILS), Bounce Back Loan Scheme (BBLS) or one of the government’s other COVID-19 schemes. 

Cash flow loans pros & cons

If you’re eligible, you’ll usually receive cash flow finance quickly. Lenders will require you to provide information to show that your business is established, including:

  • Accounts

  • Trading records

  • Evidence of a cash flow budget

Some lenders may want to perform a credit check too. 

Bear in mind that interest rates on cash flow loan repayments are likely to be a lot higher than those on traditional long-term bank loans due to the short-term nature of the repayments. Take the time to understand the annual percentage rate (APR) on different loans and consider whether the repayment schedule will work for you.

You can use the Funding Options platform to find the right finance for your business. Compare over 200 lenders in a couple of minutes; it’s easy to use and there’s no obligation. You’ll just need to tell us how much you need to borrow and what it’s for.

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Ways to manage cash flow

Cash flow management is critical, yet cash flow loans aren’t the only solution out there. Every business is different and there are a few ways you could improve your position if you feel like your business is in an unstable position when it comes to cash flow, including:

  • Selling or refinancing assets using asset refinance

  • Getting a business overdraft

  • Taking further action with clients/ customers who owe you money

  • Obtaining invoice finance

  • Setting up new credit facilities

Remember to prioritise cash flow forecasting when creating a sustainable business plan.

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Joe Morley
Joe Morley

Head of Unsecured Lending

Joe has worked in the alternative lending space since 2015. During this time he has helped hundreds of SMEs access millions in essential funding ranging from long-term asset-backed lending to short-term unsecured revolving credit lines and beyond. In his role, Joe manages and supports a large team of Credit Finance specialists.

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