Cash flow loans are an alternative to asset-based lending, where a lender provides access to capital based on a business’s profitability and sales. The funds are “unsecured,” meaning that there’s no collateral requirement.
This type of financing can be subordinated and preserve senior lending relationships. Use of funds is dictated by the specific lender you’re working with, although a majority allow an unrestricted use of funds. Repayment schedules are generally short-term, with most solutions rarely extending past 18 months.
Cash flow loans are a great option for businesses with few assets or those who simply prefer not to use their assets as collateral. They’re also useful for businesses with current credit facilities who need further capital, newer businesses that can’t meet traditional eligibility requirements, and those who need access to capital immediately.
Continue reading to explore the top cash flow loans available to entrepreneurs in 2024. Remember, though, that the “best” option will depend on your business, situation, and goals.
What Are Small Business Cash Flow Loans?
Small business cash flow loans are unsecured financing designed for businesses at all stages of operation. Since there’s no collateralization process, lenders use your business’s cash flow and sales to determine eligibility.
The lender will evaluate your previous cash flow, your projected future cash flow, and other factors to assess your creditworthiness. Credit scores and time in business play less of a role, which allows a wider range of entrepreneurs to reach an approval.
The less restrictive eligibility criteria do come with a price tag – higher interest rates. Small business cash flow loans generally have higher interest rates than other financing solutions because the lender is assuming a major risk by not considering your credit score or requiring collateral.
Still, the funding speed, accessibility, and opportunity to build a financing relationship with a lender that can grow with you offset the higher cost of capital for some businesses. If you’re looking to explore asset-backed financing solutions, click here.
How Do Small Business Cash Flow Loans Work?
Small business cash flow loans work by granting businesses a borrowing based on past and forecasted cash flow. Lenders will plug your cash flow projections, seasonal income, percentage of returning customers, expenses, and your incoming and outgoing transaction history into a formula to determine your maximum borrowing amount.
This type of financing doesn’t take your credit score or your ability to offer collateral into account. Instead, they focus almost exclusively on your cash flow, which can be both positive and negative.
The lack of extra security (collateral) makes it riskier for the lender to finance your business, so they’ll enforce higher interest rates as a method of ensuring they aren’t losing everything in the event that you default.
Cash flow loans are fast, too. You can potentially have the borrowed funds in your account within days of submitting your application, allowing you to start investing them in your business promptly.
Types of Cash Flow Loans for Small Businesses
There are multiple types of small business cash flow loans available to entrepreneurs, but the most common ones include revenue-based financing, business lines of credit, short-term cash flow loans, and subordinated debt financing.
|Type of Financing||Description|
|Revenue-Based Financing||Revenue-based financing uses your current and projected sales to offer access to immediate capital. Lenders will evaluate your cash flow statements and any financial information you have concerning your profitability and offer you funding based on the capabilities of your business.
Any business that deals with cyclical or seasonal business activity will benefit from a merchant advance, as this financing option can help you bridge your slow seasons and set yourself up for your busy time of year.
|Business Line of Credit||Business lines of credit are one of the most flexible financing options you can leverage for your business. This financing is a revolving credit line that you can draw on whenever you need capital for your business expenses.
Once you pay off the amount you’ve borrowed, you can draw on the same funds again, allowing you to stay proactive against any challenge you encounter.
You can use the funds for almost any business purpose, too, which can help you pay off expenses, hire new employees, or launch a marketing initiative with ease.
|Short-Term Cash Flow Loans||Short-term cash flow loans are the easiest of the bunch to secure for your business. This type of financing is designed for businesses that haven’t operated very long and have limited financial history/information.
Instead of relying on the traditional eligibility criteria, lenders will thoroughly evaluate your cash flow documentation to determine your ability to repay the borrowed funds.
The lack of financial information in the review process significantly increases the risk for the lender, so they’ll charge you higher interest rates as a method of protecting themselves if you default on your payments.
|Subordinated Debt||Subordinated debt, or sub debt, is revenue-based financing that funds at the subordinated (secondary position).
If you have an existing credit facility that’s tied to your assets, that financing technically holds “first position,” meaning it’s repaid first in the event of bankruptcy. Sub debt appears on the balance sheet underneath your senior facility and won’t interfere with the relationship.
In short, subordinated debt is a revenue-based solution businesses can leverage for additional capital when they have senior financing in place. It’s useful for growing businesses that come across opportunities they can’t afford with their current credit facility, as well as private equity/M&A groups looking to bridge capital gaps.
How Can You Use Small Business Cash Flow Loans?
Entrepreneurs use small business cash flow loans to help them manage their cash flow and pay off lingering debts that are causing issues in their daily operations, but they can also use them to afford growth opportunities.
Some savvy entrepreneurs leverage small business cash flow loans to manage their working capital as they pay for a more sizeable expense, like a new building acquisition or a massive renovation. The possibilities are endless, but here are some of the most common uses of small business cash flow loans:
- Working capital management
- Technological updates
- Launch of a new marketing initiative
- Office renovations
- Equipment repairs/updates
- Hiring new employees
- Bridging payment gaps
- Prepare for upcoming busy seasons
- Any other business expense!
Keep in mind that cash flow loans generally have short repayment periods of no more than 18 months. If you’re planning on a major expansion or your opportunity won’t yield revenue gains within the next 18 months, you should consider other options as you search for the right offer.
What’s the Difference Between Cash Flow and Asset-Based Lending?
The key difference between cash flow loans and asset-based lending is collateral. When applying for cash flow loans, you won’t be required to offer an asset as collateral, you will be evaluated based on your cash flow information instead.
When applying for asset-based lending, however, you will be required to offer collateral in order to get approved.
Cash Flow Lending
Cash flow lending is essentially the opposite of asset-based lending. With cash-flow financing, lenders evaluate your eligibility based on your cash flow information, meaning they’ll carefully review your incoming and outgoing transactions to determine your capability of repaying a loan.
You won’t be required to offer an asset as collateral, and your credit score weighs less, which makes this option significantly beneficial for newer businesses and those who are working to improve their credit scores.
On the other hand, asset-based lending requires a collateral offering to reach approval. Lenders will still review your financial information and consider it for approval, but it’s weighed less because you’ve secured the financing through your collateral offering.
Interest rates on asset-based lending are lower than cash flow loans due to the layer of security the collateral provides to the lender, but it’s very important to stay on top of your payments regardless of the interest rate, especially in asset-based lending situations.
If you default on your payments, the lender can seize your collateralized asset to recoup the funds you aren’t able to repay, leaving you to figure out a way around having that important asset on your balance sheet.
How to Qualify for a Cash Flow Loan
Qualifying for a cash flow loan is much easier than most asset-backed solutions. You don’t need a strong credit score, but you will need revenue streams that align with your desired funding amount.
Here are National Business Capital’s minimum qualifications.
- 1 + Year in Business
- $500,000 in Annual Revenue
If you qualify, complete our digital application to start the process. A Business Finance Advisor will reach out to you shortly after to learn more about you, your business, and what you’re looking to use the funds for. This way, we’re able to apply your business with the lenders most likely to return a competitive offer, and we have all the information we need to advocate for the future of your business.
How to Apply for a Cash Flow Business Loan
Applying for a cash flow loan is as simple as finding a lender and completing an application. Finding the best offer you qualify for, however, isn’t as straightforward.
National Business Capital makes this process much, much easier. Instead of applying to lenders one by one, you can complete our application and unlock multiple financing options, all finely tuned to your specific opportunity or challenge.
Here’s what to expect from our process.
- Apply Securely Within Minutes – Move through our streamlined application within minutes and upload your business documents with zero risk.
- Review Your Offers – Compare your offers with expert advice from our team and select the best one for your specific circumstances.
- Receive Your Money – Seize an immediate opportunity to grow your business or tackle a new challenge with confidence.
Don’t waste your time; Explore the most competitive offers you qualify for with market leaders in $100K to $5M transactions.
Choose National Business Capital for Small Business Cash Flow Loans
It’s not about just getting any approval for your business; It’s about getting the RIGHT approval that will let you grow your business without restraint.
Many entrepreneurs don’t have spare time or the ability to step away from their business for an extended period of time, forcing them to settle on the first best lender and restricting their ability to grow.
National Business Capital is here to help you streamline your search for competitive financing options. With $2+B financed for businesses nationwide and 3,000+ 5-star reviews on Trustpilot, you can trust that National will be there for you before, during, and after your deal is funded.
Ready to get started? Complete our digital application today, and our team will be in touch!
Frequently Asked Questions
How Does Cash Flow Lending Work?
Cash flow lending involves term loans that are granted based on an organization’s past and projected cash flow. Other financing options tend to emphasize your credit score, assets, and other financial information more heavily, but with cash flow lending, your incoming and outgoing transactions are most important.
You don’t need to offer collateral to secure your cash flow loan, too, which makes it easier for newer entrepreneurs to qualify and reach approval.
What Is the Easiest Loan to Get to Start a Business?
Of all the financing options available to entrepreneurs, SBA microloans are some of the easiest to qualify for. SBA microloans feature a borrowing limit of $50,000 and some of the lowest interest rates on the market, not to mention the partial guarantee of funds, which makes them a more attractive endeavor for lenders to take on.
You don’t have to be a new business to secure a microloan, but if you are, this financing option can give you the opportunity you need to grow and scale.
Can I Get a Loan Based on My Assets?
Asset-based lending allows you to leverage the assets on your balance sheet as collateral to secure a loan. Offering an asset as collateral gives your lender an extra layer of assurance that you’ll repay the loan within the terms, and if you don’t, they’re legally allowed to seize the asset to recoup their losses.
Some entrepreneurs try to avoid offering collateral at all costs because they don’t want to risk losing something vital to their operations. But, if you are actively involved in your repayment, you likely won’t have a problem, and you can grow your business without restraint.
How Can a Cash Flow Loan Benefit My Small Business?
Cash flow loans are a method to quickly inject liquidity into your daily operations. If you discover an opportunity to build out additional revenue or grow in another manner, you can leverage a cash flow loan to take advantage of it without putting too much pressure on your cash flow.
The funds can increase your purchasing power, streamline cash flow during a busy/slow season, cover operating costs, and more. As long as you work with the right lender, cash flow loans can unlock sustainable growth.
What Documentation Is Needed to Apply for a Cash Flow Loan?
Cash flow loans require less documentation than asset-backed solutions, but you should expect to provide some basic information that tells the lender a bit about you, your business, and how it’s trending.
Here are the most commonly requested documents, although your lender may not request all of these.
- At least one full year of business bank statements
- Two – most recent – business tax returns
- Balance sheets
- Cash flow statement
- Profit and loss statement
- Business debt schedule, if applicable
- Details of accounts receivable and accounts payable
- Description of and proof of ownership for collateral
- Proof of business insurance
- Licenses, permits, articles of incorporation, and other legal documents
- Business certificate
- Detailed personal financial information
- Complete business plan, including a detailed description of your business, products or services, structure, management, and marketing plan, as well as financial projections
What Is the Typical Loan Term and Repayment Schedule for Cash Flow Loans?
Cash flow loans generally carry shorter repayment terms and rarely extend past 18 months. Since the repayment is on the shorter side, daily and weekly payments are common, although monthly payment options are available in situations where it makes sense.
Phil Fernandes serves as Chief Operating Officer for National Business Capital. He boasts 15 years of experience in sales and 10+ years of management experience as National’s VP of Financing/Analytics. Phil is also an excellent writer who's completed the Applied Business Analytics executive program at MIT and regularly contributes articles to National Business Capital’s blog.