What Is a Cash Flow Loan? - National Business Capital

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What Is a Cash Flow Loan?

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Banks, credit unions, and online lenders all have different eligibility requirements that businesses must meet before they can reach approval on the financing they need to grow. They’ll evaluate your credit score, time in business, and revenue to determine if your business can pay back the amount you seek to borrow. Some businesses, like those that haven’t operated long or have less than stellar credit, may find it challenging to qualify for this reason, which can bring their growth to a screeching halt.

Lenders do exist for newer businesses or those with poor/limited credit histories, but they often require you to submit an asset as collateral to secure the financing. But, what if you don’t have a valuable asset in your business to offer to a lender?

A cash flow loan can help you manage your working capital and cash flow, giving you an opportunity to reorient your strategy and position yourself for maximum growth. Cash flow loans have looser requirements than traditional loan options, with less emphasis on credit score and collateral, allowing more businesses to reach approval. However, the less restrictive eligibility requirements come at a price—higher interest rates—and businesses must carefully monitor their repayment to ensure they aren’t paying too much in interest.
Cash flow loans can be a game-changer for your business, but only if you understand how to secure one and are actively involved in the repayment process. If you’re wondering, “What Is a Cash Flow Loan,” read on for our comprehensive guide on the topic to gain a competitive edge as you navigate through the process and grow your business.

What Is a Cash Flow Loan?

A cash flow loan is a traditional bank loan minus the strict eligibility criteria. Lenders won’t weigh your credit score as heavily when deciding on your approval, which allows a broader audience to qualify and secure the funds they need to grow. Instead of determining your eligibility on your financial history or time in business, lenders will carefully review your cash flow and offer you financing based on how much revenue you’re expected to earn in the future.

You can use a cash flow loan for day-to-day business purposes, like working capital management, inventory purchases, and paying off utility expenses. The borrowing limits are often lower than traditional loan options, however, which does limit your ability to make large purchases using your cash flow loan. Additionally, it isn’t recommended to make large purchases or fund extensive ventures using the money from a cash flow loan because of the high-interest rates that characterize this type of financing.

The lack of emphasis on your credit score or collateral offering makes it difficult for lenders to determine the risk associated with financing your business. Instead, they’ll charge higher interest rates as a method of ensuring that they’ll recover some of the borrowed amount. Essentially, this shifts the burden of risk onto the business owner. But, if you can’t qualify for traditional financing options, you might want to consider using a cash flow loan to support your growth, despite the higher interest rates.

How Does a Cash Flow Loan Work?

The lender you’re doing business with will carefully review your business’s cash flow information. They’ll review your past performance, with a strict emphasis on your organization’s monthly revenue, and use algorithms to evaluate your transaction history, both incoming and outgoing. The lender will also take your cash flow projections, seasonal income, percentage of returning customers, and expenses into account before making a decision.

All of this data allows the lender to gain an accurate picture of your business’s capabilities. Once they review all this information, they’ll have a good idea of how you’ll repay the financing, which will allow them to come to a maximum dollar amount for your cash flow loan. However, without your credit score and collateral playing a role, there’s still a degree of risk involved for the lender. 

The riskiness of financing your business translates to the interest rate you pay on your financing. Cash flow loans tend to have some of the highest interest rates because of the loose eligibility requirements and lack of collateral, so expect to pay a significant amount in interest. Some entrepreneurs are deterred from cash flow loans because of this, but if you stay on top of your payments and pay off the borrowed amount swiftly, you likely won’t have a problem with the interest payments, depending on the capabilities of your business.

Pros and Cons of Cash Flow Loans

Cash flow loans are an avenue for newer businesses and entrepreneurs with less than stellar credit to secure the funds they need to grow promptly, but there are some drawbacks that you should consider. Here are the pros and cons of cash flow loans:

Pros

  • Fast financing
  • No credit score requirement
  • No need to offer collateral
  • Opportunity to build business credit by making timely payments

Cons

  • Higher interest rates
  • The lender may require a lien or personal guarantee
  • Limited borrowing amounts
  • Low transparency, depending on the lender

Although cash flow loans are commonly referred to as “unsecured business loans,” this isn’t necessarily true in all instances. Some lenders will place a general lien on your entire business or make you sign a personal guarantee to lower their risk, which is especially problematic if you default on your payments. 

Cash flow loans can be an avenue toward growth, but if the interest rate exceeds the capability of your business, it can potentially limit your benefits. Be sure to review all the details of your repayment with your lender before making any final decisions. And, of course, you should also shop around between lenders and compare their programs. You never know what kind of deals are out there, so make sure to do your due diligence and research extensively.

Cash Flow Loan Alternatives

Cash flow loans won’t fit the needs of every entrepreneur. If you find that a cash flow loan won’t benefit your specific situation, there are a few different routes you can take. 

If you aren’t seeking a substantial amount, you might be able to secure funding through your bank or credit union. Many of these lending institutions will finance small amounts of capital to businesses without stellar credit scores or lengthy time in business. Their financing will likely feature less intensive interest rates, but you may need to offer collateral as a result.

You can also reach out to local lending institutions to see what programs they offer. Some jurisdictions have non-profit lenders that will finance businesses in their area to strengthen the local community. There are also industry-specific lenders, like the USDA for the agricultural industry, but these come with their own set of eligibility criteria and requirements that you’ll have to meet in order to qualify.

Businesses without strong financial information or extended time in business may find it difficult to qualify for anything other than cash flow loans, limiting their options entirely. Anyone in this situation should consider proactively strengthening their credit score before applying to lenders. Using business credit cards and vendors who bill on business credit can help strengthen your financial standing if you manage your payments correctly, but this is only beneficial if you have the time. 

If you believe you’ll need to leverage financing in the future, it’s a good idea to start planning today. With a little forethought, you can make your business exponentially less risky for a lender, increasing your chances of reaching a favorable approval.

What Is the Difference Between a Cash Flow Loan and an Asset-Based Loan

Cash flow loans are technically secured by your future cash flow, whereas an asset-based loan is backed by a tangible asset on your balance sheet. Lenders will carefully review your cash flow statements before approving your cash flow loan, and they won’t consider your creditworthiness nor your ability to offer collateral in their decision. While lenders will use these factors in asset-based loans, they aren’t weighed as heavily because the financing is already secured by the asset the entrepreneur submits as collateral.

Some businesses can’t qualify for asset-based loans because they don’t have any valuable assets on their balance sheet. For example, a newer restaurant might only have a few ovens and other minor supplies, none of which would qualify as collateral for a loan. Instead, they might seek out a cash flow loan, as this financing option doesn’t require collateral and, most importantly, is based on their future cash flow projections.

Asset-based loans tend to have lower interest rates compared to cash flow loans. The lender offering an asset-based loan has less risk because of the collateral offer, which allows them to offer financing with less intensive interest rates. However, this doesn’t necessarily mean that the interest rate on your asset-based loan will be low. Lenders take a variety of other factors into account, including your credit score, time in business, and annual income, before determining the interest rate you pay.

Streamline Your Search for Cash Flow Loans With National Business Capital

Cash flow loans exist to help business owners with abridged time in operation, and lower credit scores secure the funds they need to grow. Although the interest rates are higher than other financing options, cash flow loans provide an opportunity to reorient your strategy and fix any issues within your business that you weren’t able to before, making you much stronger overall. The possibilities are endless, but your specific benefits will depend on the terms you’ve agreed to and your ability to repay the borrowed amount within the term.

Searching for a cash flow loan lender isn’t easy, especially if you’re managing the day-to-day of your business. You’ll need to research lenders and their programs, but as you know, this takes time and attention away from what matters most. Rather than take time away from running your business, you can streamline your search for cash flow loan options with National Business Capital, the leading FinTech marketplace. 

At National, we’ve finely tuned our client-focused process to best fit your needs. Our entire application process is digitalized, our experienced Business Finance Advisors do the heavy lifting for you, and we’re there for you every step of the way, giving you an ally in your corner as you navigate through the challenges of running a business. Whether you need a cash flow loan, an asset-based loan, or any other type of financing, you can trust that National will find you the best deal within our 75+ lender marketplace

Ready to get started? Complete our digital application in minutes, and our team will reach out promptly. 

FAQs

Are Cash Flow Loans Secured?

Cash flow loans are technically secured by your future cash flow. Lenders put your cash flow projections, seasonal revenue, percentage of returning customers, and expenses into various equations and compare their findings to your projected future cash flow. Once that’s completed, they’ll establish a dollar amount that will serve as your maximum borrowing limit. 

You can borrow an amount lower than your maximum limit, but your lender won’t allow you to borrow in excess of this limit because of the risk it imposes on them. You should try to borrow less than your maximum limit to give yourself the best chance of paying off the borrowed amount, but this will depend on your circumstances. If you need to borrow the maximum limit, you shouldn’t be worried, as long as you make timely and consistent payments on your financing. 

Why Do Lenders Look at Cash Flow?

Lenders will use your cash flow statements to understand your ability to repay a loan. If your cash flow is positive, and the number you bring in each month is higher than the payments you would have to make on your financing, then the lender will likely approve you for a loan, depending on their other qualifications. Cash flow loans almost exclusively use your cash flow statements to determine your eligibility. Without the collateral offering and emphasis on your credit score, the lender’s risk is noticeably higher than other financing options, which translates into higher interest rates.

Can I Get a Loan Based on My Assets?

Asset-based loans allow entrepreneurs to leverage the assets on their balance sheet as collateral for financing. While lenders will still need to review your financial information before approving you for financing, these factors are weighed less intensively because of the collateral, making it easier to qualify.

Last Updated on September 19, 2022

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About the Author, Lauren Coppolone

Lauren is the Marketing Manager at Nationalbusinesscapital.com. She has 7 years of professional experience with a focus on small business marketing and finance. She previously worked as a senior business analyst for B2B SaaS, Sky IT Group. She has covered topics including, business financing, startups, retail, taxes & regulations, etc. Her work has been featured by USA Today, Google & Yahoo News. Lauren holds a B.A. from the Fashion Institute of Technology’s (FIT) School of Business.

https://www.linkedin.com/in/laurencoppolone/


Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advice from National Business Capital and the author. Do not rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely on this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there may be errors, omissions, or mistakes.