A comprehensive guide to cash flow lending

Business owners sometimes need quick loans just to meet their daily expenses. When cash flows are inconsistent due to a bad seasonal phase or late payments, you might think of a loan. However, due to poor or insufficient credit history, you might not think about commercial business loans as most of the lenders check the credit report before lending loans. Don't lose hope as you can always go for cash flow lending. It is a quick and easy way to get a loan and we will discuss more it in this post.

Cash flow lending definition

When businesses need funds to run their day-to-day operations, they go for cash flow lending, a type of unsecured loan used to fund working capital such as payments, rent, inventory and other things. The loan is paid back once the cash flows are regular and the business is good. Here, you borrow funds from revenues that you are going to earn in the future.

One thing that you need to understand here is that cash flow loans are not traditional commercial business loans that require a thorough analysis, research related to financial health of the business, credit history and a credit report. Only one thing matters here is the capacity of your business to generate cash flows. This is the only eligibility.

How does cash flow lending work?

More often than not, cash flow leading is used by small and new companies with no available assets, a profitability proof or a good credit history to apply for commercial business loans. Sometimes, lenders exploit cash flow borrowers by charging high-interest rates and high original fees. Experts recommend to pay back the cash flow loans as soon as possible as it might harm your business if you fail payments.  

One of the ideal cash flow lending examples is a seasonal greetings cards company. The company makes most of its sales in November to February due to various festivals such as Christmas, the New Year and Valentine’s Day. Now, in summer months, cash flow might be low due to obvious reasons. Hence, to cover the cost of payments, rents and other bills, the company owner can apply for a cash flow loan and pay the loan back with interest in winter months when cash flow picks up.

What are the limitations of cash flow lending for businesses?

No matter how feasible we find these cash flow loans in dire situations, you need to know about some limitations associated with cash flow loans.

High fees

Lenders know that you are not in a good position to bargain and they exploit your situation by not only setting high-interest rates but also by charging high fees and penalties for late payments. If you fail to pay the instalments regularly, you might go dry very soon. Before applying for a cash flow loan, ask whether your company is in a position to pay back the amount with interest in a specific time? Can you handle late payment fees in case you missed scheduled payments?  

Personal guarantees

What do you have that can be used as collateral in cash flow lending cases? Don't think that you can get cash flow loans without any assets as collateral as lenders might ask you to place a general lien over your whole business as part of the loan agreement. In addition to that, the lender also may ask you to sign a personal loan guarantee. It means that you are personally responsible to pay back the loan.

Automatic payments

Automatic payments mean an arrangement in which payments are directly transferred from your account to the lender's account. Sometimes, lenders ask for automatic payments when you don't have enough money in your business accounts. When your cash flow varies from month to month, this request is common when you apply for a cash flow lending.

Asset-based lending and cash flow lending

Now, let's understand some key differences between asset-based lending and cash flow lending to have a better understanding of both types of commercial business loans.

Collateral

When you apply for an asset-based loan, your tangible assets such as properties, inventories or equipment are used as collateral. When it comes to cash flow lending, your expected cash flows in the future is your collateral. However, one thing we need to mention here is when you apply for an asset-based loan, the lender will check your cash flows too, but it is not a decisive term when you have good asset valuation.

Suitability

You also need to consider suitability when you are discussing asset-based loans and cash flow lending. Big organisations generally prefer asset-based commercial business loans as they have large balance sheets and a wide range of assets to use as collateral. When small organizations and entrepreneurs tend to opt for cash flow loans as they have high margins on their balance sheets and also don't have any assets to put as collateral.

So, if your business is tight on cash flow don’t forget to consider the points above to improve your situation.  Good luck.