Cash flow is just as important as profit when it comes to the financial health of your business. Even if your company has high profits, extended payment terms and seasonal sales can cause cash flow gaps that restrict growth.
A cash flow loan can boost working capital and support growth without the need for real estate collateral. Unlike a traditional loan, cash flow lending is based on your future cash inflows, not on the value of the physical assets on your balance sheet.
Here’s everything you need to know to work out if a cash flow loan is a good idea for your business.
What Is a Cash Flow Loan?
A cash flow loan is a type of financing based on the projected and historical cash flows of your business. While a traditional asset-based loan requires security in the form of property or high-value assets, a cash flow loan does not require any physical collateral.
There are different types of cash flow lending, but they all primarily involve using your projected sales revenue as a way to secure immediate funding.
How Do Cash Flow Loans Work?
In simple terms, cash flow loans enable you to borrow money based on your future earnings. If your business experiences cash flow gaps due to seasonal sales or extended payment terms, a cash flow loan can be a way to increase working capital quickly.
One of the most popular and well-known forms of cash flow lending is Invoice Finance. With an Invoice Finance facility, you can access the money owed to your business by unlocking the capital tied up in your outstanding sales invoices.
Rather than waiting for your customer to pay, you can submit your invoice to the finance company and get a cash advance of up to 95% of the invoice value upfront. Once your customer pays the invoice, you receive the remaining balance of the invoice less fees.
Invoice financing is technically secured by your accounts receivable and not your projected cash flow. But your outstanding invoices are the only collateral you need to secure funding. You don’t need to use your home as security.
Cash Flow Lending vs. Asset-Based Lending
Both types of financing can raise the capital you need to grow your business and achieve your goals. You may find that a combination of asset-based and cash flow lending offer the long-term affordability and short-term flexibility you need to fund the growth of your business.
With asset-based lending, the amount of money you can borrow is based on the value of the assets you are willing to use as collateral. Traditional asset-based lending like secured loans can be difficult to access if you don’t have real estate to use as security. Over 50% of secured business loans in Australia are secured with residential property.
With cash flow lending, the amount you can borrow is based on the projected cash inflows your business will generate in the future. The lender is less concerned about the value of the assets on your balance sheet and more interested in your ability to repay the principal and interest of the loan.
In general, asset-based lending is more suited for long-term borrowing. online payday loans Nevada Cash flow lending is more flexible and suitable for short-term working capital needs.
Pros and Cons of Cash Flow Financing
Pro – Fast Cash Injection Because there is no asset valuation required, cash flow lending can help you quickly raise capital to cover cash flow gaps or take advantage of opportunities. With Invoice Finance, you can access funds within 24 hours of submitting an invoice.