Cash flow loans for small businesses

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    Chris Godfrey

    Page written by Chris Godfrey. Last reviewed on July 12, 2024. Next review due March 1, 2025.

    Cash flow can make or break any business, and poor cash flow is the biggest reason many small businesses fail. When money is going out faster than you can get it in, you have a recipe for disaster, but cash flow loans are designed to eliminate this problem – providing short to medium-term financing that can reduce financial pressure and give your business the chance to grow again. 

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      What are cash flow loans for small businesses?

      Cash flow loans are short to medium-term business loans used to cover dips in your income stream. Most easily secured from online or alternative lenders, cash flow loans can be used for day-to-day expenses, covering rent, making payroll, and many other needs. The funds are typically lent against the strength of your sales and credit history and paid back from your business’ incoming cash. 

      How do cash flow loans work?

      Cash flow loans are usually taken out by small businesses that have wide fluctuations in their income stream, or lack sufficient credit history, hard assets to act as collateral, or the strong profitability required to secure long-term business financing. Because these types of small business present more risk, cash flow loans typically come with higher interest rates and fees than other business loans. 

      Cash flow loans are available in a range of flavors and may require no collateral, although depending on the type of financing you choose, your credit card sales or invoices may be used to secure certain types of financing.

      Types of cash flow loans for small businesses

      Common types of cash flow loan include:

      Term loans

      Term loans are the simplest type of cash flow loan. Based on the strength of your revenues, cash flow forecast and credit history, you receive a single, lump-sum cash injection and then pay it back in regular instalments. Collateral may be required.

      Business lines of credit

      Also called a revolving line of credit, this type of cash flow financing functions like a high-value credit card but comes with lower interest rates and fees. Businesses can withdraw as much as they want when they want from a loan facility up to the limit of their borrowing. You only pay interest on the sums that you withdraw. Interest rates are usually fixed, and your business may repay on a set or flexible schedule. Collateral may be required.

      Invoice financing

      Also known as account receivables financing, invoice financing allows small businesses to borrow against the value of their unpaid invoices. The lender may provide up to 95% of the invoice value within a few days or even hours of the bill being raised. Your invoices act as security, no added collateral is required.

      Merchant cash advance

      MCA’s are available for businesses that accept customer payments by credit and debit card. You borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Pay the loan back with a fixed percentage of your card sales on a daily, weekly or monthly basis. Your sales act as security for the loan, no added collateral is required.

      Revenue-based financing

      Revenue-based financing functions like a merchant cash advance but with higher borrowing limits. Based on the size and regularity of their total revenues, (not just their credit card sales), organisations may receive a lump sum and pay it back over a short-term schedule, typically by small deductions from their daily sales. 

      Top tip: Merchant cash advances and revenue-based loans can usually be secured very quickly as qualification rules are less intensive and credit scores are not so critical.

      What can I use cash flow loans for?

      You can use a cash flow loan for almost any legitimate business purpose, including:

      • Paying day-to-day bills like rent and utilities
      • Making payroll
      • Buying inventory
      • Covering taxes 
      • Paying for advertising and marketing activities
      • And more

      What's the difference between cash flow and asset-based lending?

      Cash flow loans are short to medium term financing options used to cover operating expenses. They are based on the strength of your business’ sales and credit history and in some cases, no added collateral is required. 

      Asset-based lending can either be financing to buy capital equipment, such as plant and machinery, or other hard assets such as business real estate. The funds must be used for this specific purpose and the lender will retain a lien on the assets until the loan is repaid. Alternatively, asset-based lending can use the hard assets your business already owns – such as your factory or store – to provide extra financing that you can use elsewhere in your business operation. Your assets are pledged as collateral until the loan is repaid.

      Key difference: Cash flow loans may require no collateral. Asset-based lending always does.

      How do I qualify for a cash flow loan?

      There are few set rules for qualifying for a cash flow loan as every lender will have their own criteria. However, funders will typically review your revenues, credit history and profitability before offering any kind of financing. If your sales stream is erratic or your credit is weak, you can improve your chances of success by offering collateral or selecting a type of loan that gives the lender more security – such as a merchant cash advance or an invoice-finance option. 

      How to apply for a cash flow business loan

      Follow these key steps to secure your cash flow loan:

      Step 1: Review cash flow loan requirements

      Cash flow loan applications can be affected by a number of different factors:

      • Credit score – typically you need 80+ for business credit and a minimum 550+ for personal (600+ with many major banks and credit unions)
      • Length of time in business – start-ups and very young businesses will find it more difficult to secure a cash flow loan
      • Business track history – this means having a strong financial record and a habit of paying your debts on time
      • The type of industry you operate in – some business sectors are riskier than others
      • Sufficient documentation – lenders will need to see accurate and up to date records
      • Use of funds – what you want the money for is important. Lenders will usually want to see the funds will be used to support growth

      Make sure your application meets the individual loan requirements of the lender you select. Don’t just assume all lenders are the same.

      Step 2: Determine the right financing option

      Some cash flow loans will work better for your small business than others. Should you go for a term loan or a line of credit? Which cash flow loans are cheapest? Which are the fastest to secure? Research all the funding types before settling on your final option. 

      Step 3: Compare lenders

      It makes sense to shop around for cash flow loans before settling on a lender. You can do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that will introduce you to a choice of loan deals from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for small business owners who have never taken out a commercial loan before. 

      Step 4: Gather documentation

      Every lender will have their own list of required documents, but most will need to see bank statements (usually at least 18 months), balance sheet, profit and loss statements, cashflow projections, list of debts, list of assets, customer database, articles of incorporation, business licenses, certificates of good standing, tax returns and more. 

      Step 5: Apply for your loan

      Make sure you are within the deadline stipulated by the lender before submitting your application and ensure you have provided all the necessary documents and information they require. Keep in mind that processing times can vary enormously, with some providers taking many weeks to arrive at a final decision and disburse their funds. 

      If you need funds in a hurry, you may be eligible for a fast cash flow loan. Start that process here.

      Get started with Swoop

      No matter if you’re seeking your first business loan or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for your loan. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality cash flow loans from a choice of lenders. Give your organisation the financial boost it deserves. Register with Swoop today.

      Written by

      Chris Godfrey

      Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.

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