14 September 2019
Cash Flow Financing Guide That All Business Owners Must Read
Entrepreneurs are always on the lookout for favorable financing options to grow their business, stock up, or expand. There are many lenders with products in the market worth exploring.
Online lenders that give unsecured loans are fast to dispense the cash but are expensive and limit the loan amount due to the risks involved. Traditional banks that have significant loan limits will take a longer time to process the funds and require a tedious application process.
Cash flow financing is one of the many available options.
What is cash flow financing?
Here is where a company’s expected cash flow works like collateral on a loan made to a company. It is different from an asset-backed loan. The repayments for cash flow loans, in this case, are based on projected cash flows.
Why lenders opt for cash flowing financing
Prepare or stock for peak periods: Businesses that are seasonal or experience a massive flow of customers on specific days need funds to meet clients’ demands during these peak times.
Lock-in a one-off good deal: Sometimes rare opportunities present themselves and you have a short window to change your course. It could be a significant discount on stock or raw materials or office space at a rate you will never come across again. You will need cash to lock in the deal.
Invest in equipment and inventory: Whether seasonal or demand-driven by an event, you may need to stock up or buy equipment for the business.
Hire new staff: Time and time again, a business will experience the need for new employees in its growth process as it expands. Facilitating the recruiting process and have the right people on board needs cash.
Open new location: Opening a new location for any business venture is an expensive affair that requires extra finances most of the time. Apart from the premises, you need additional staff, equipment, furniture, among others. All these have a financial implication.
Here is what you need to know about cash flow financing basics
Cash flow financing is best for businesses that demonstrate steady growth of cash inflow and need an upfront investment to bring in more revenue.
Lenders who offer cash flow financing look for a business with a net revenue that can cover all debt obligations.
Different types of cash flow financing
You may have to use one of these cash flow financial types. See below what is best for you, and when it is practical.
In a term loan arrangement, you borrow a lump sum and pay it back in monthly, biweekly, or weekly installments until you are debt-free. It works the same with a student loan, car loan, or mortgage loan.
Term loans are great for established small business owners considering an investment that will bring forth steady cash inflow, resulting from the initial investment.
Term loans are fast to process with the approval time ranging from two days to two weeks. Factors that affect the Annual Percentage Rate (APR) of a term loan include borrower’s credit history, collateral to secure the just right loan, and length of the loan.
Business credit cards
Business credit cards are easy to access, making this type of cash flow loan one of the most popular ones that are used to cover short-term needs.
The downside of credit cards funding is high APRs and low limits. These limitations make them impractical to take care of substantial cash flow gaps or projects that are capital intensive. This type of cash flow financing works best for covering operation costs that are payable in full within one month.
When used well, business credit cards can allow a small entrepreneur to increase purchasing power, even for the short term.
For companies with only months of operations, a business credit card is among the best ways to get debt financing, while also building a business credit score.
All entrepreneurs are looking for an extra client. Landing a big contract for a small business is incredible, but can be a source of stress, as you need cash upfront to fulfill the order.
Invoice financing allows you to borrow money based on the amounts due from clients. Lenders that facilitate this cash flow financing are government agencies, financial institutions, or large corporations.
Invoice financing works best for small business with a good credit score and a long history of making good sales. Businesses that have achieved top status on the preferred vendor status with government agencies or large corporations can qualify for this cash flow financing.
Credit lines, unlike credit cards, are more formal agreements between lenders and borrowers. They are based on an existing relationship. Credit lines also give business access to cash flow financing that you may take advantage of to make investment opportunities or cover working capital needs.
Another significant difference between the two is that credit lines charge lower interest than a business credit card.
Businesses that need capital to cater for seasonal cash flow gaps will often benefit immensely from this cash flow financing option. This is because applying for a loan anytime you have a cash flow gap is impractical. Access to a pre-determined amount saves you both time and money.
When you need to make periodic cash payments to different contractors, suppliers, or vendors that do not take credit card payments, a credit line is useful.
Merchant cash advance
This is a payment made in advance against future business income, but it is not a loan. A merchant cash advance provider gives a lump sum, paid automatically as a percentage of the daily credit card receipts.
The advance amount determines the length of the repayment period. A merchant cash advance is not charged on annual percentage rate, like a loan, but borrowers are assigned a factor rate.
A Merchant Cash Advance is best suited for startups without a strong business credit score, but ones that can demonstrate steady inflow.
Businesses increase the chances of cash flow financing through years of operation under their belt.
Companies that seek to make a significant purchase, acquire another business, or fund their operations should consider cash flow financing loan. The companies borrow from cash flows, against rights to an agreed portion of receivables. This way, as an entrepreneur, you can access finances immediately and not in the future. When immediate cash needs are fulfilled, and the clients are happy, your business is bound to grow.