What is Cash Flow Lending?

What is Cash Flow Lending?

Published on 2022-06-21

Category: Cash Flow Management

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Picture this: You need to order inventory to complete orders that have started coming in ahead of peak season. However, you’re short of cash as some of your customers are yet to clear their dues. Unless you place your order within the next 2 days, you stand to lose out on a 5% bulk discount offered by a vendor. That doesn’t leaveyou enough time to apply for a loan and the discount is too good to let go of. This is a common problem faced by Australian business owners where speedy access to capital is of critical importance. If only getting business financing were a tad faster!

Cash Flow Lending to the Rescue

Cash flow lending puts much needed capital in the hands of business owners in the form of a short-term loan. The loan is approved based on the past performance and future earning potential of the business. If you have strong business fundamentals, you can even get away with a poor credit score. Of course, you can use the cash flow loan to meet virtually any business expense including wages, purchase of production hardware and software or for expanding to new markets.

Why is cash flow lending a better alternative to traditional loans?

Banks can take up to two weeks or more to process regular business loan applications. This is because of the need to review your creditworthiness on the basis of assorted financial statements related to your business. The longer it takes for a lender to clear a business loan, the higher the stakes for the applicant.

If the bank’s lending criteria are not satisfied, it may ask for collateral. Ultimately, cash-strapped entrepreneurs are forced to pledge their personal assets whichonly puts them at greater risk.

Cash flow loans provided by a variety of new-age non-bank companies fill this crucial gap. Cash flow lending differs from traditional business loans in that it does not require collateral. Instead, it enables business owners to borrow based on projected future revenue. The documentation required is minimal and the turnaround time can be as little as 24 hours.

This means that funds are available for you to use almost overnight. Unlike traditional loans, there is less emphasis on having a good credit score - provided you have been in business for at least 6 months and have decent receivables and other assets.

A major advantage of cash flow lending is that you can borrow smaller amounts than is possible with traditional loans. This translates into a comparatively lower interest burden and monthly outflows for small business owners. Moreover, cash flow lending solutions also offer more flexibility in terms of repayment period compared to traditional business loans. In addition, there may be some end-use restrictions with them that cash flow loans do away with.

Who is Cash Flow lending for?

Cash flow loans are ideal for business owners who do not have assets to use as collateral – especially new businesses. The lack of working capital can severely affect the growth of a small business. Cash flow loans offer considerable flexibility in terms of repayment schedule and interest rate. For example, if you are in an industry with a seasonal business cycle, you may be able to avail a customised repayment schedule.

Conversely, you may be able to prepay your loan without any penalty, depending on the terms and conditions of the lender.  Moreover, if your business credit is yet to be established, the odds of you getting a cash flow loan are much higher than a business loan. This is because lenders will scrutinise your application at length to reduce risk. As a result, you may be a while before you hear back from the lender. Cash flow loans are thus ideal for small businesses that need access to short-term financing and flexible repayment terms.

Things to remember when applying for a Cash Flow Loan:

Most cash flow loans may come with a high interest rate as there is no collateral involved. The basic rule of thumb is the higher the risk, the higher is the interest likely to be. However, you will probably end up paying less interest on a cash flow loan than a traditional loan. The reason: cash flow loans have a maximum duration of no more than 24 months as against 30 years for traditional business loans. Also, the lender reserves the right to repossess your business assets in the event of default – even if it was a not a secured (collateralised) loan to begin with.

Key questions to help determine if cash flow lending is for you:

  • How soon do you need the funds? If you need to make a business purchase within a week, it is probably best to opt for a cash flow loan.
  • Do you expect to be able to repay the loan within six months to a year?
  • Do you have enough collateral for a regular business loan?

Capital Boost is a trusted finance partner to small businesses across Australia. Contact us today to take your business growth to the next level.

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