How to Get Cash Flow Loans

What is a Cash Flow Loan?

A cash flow loan is borrowed capital that is used by businesses to fund their day-to-day operations, manage cash-flow gaps and to smooth out choppy seasonal sales.

How do Cash Flow Loans Work?

Cash flow loans allow you to borrow against the money you expect to receive at a later date. Lenders will base their decision on your business’ past performance such as sales volume/frequency, data on your customers and sales forecasts.

The process is relatively fast and straightforward. Lenders can make a decision within 24-72 hours, and businesses usually can borrow up to $250,000.

Are Cash Flow Loans Risky for Small Businesses?

Cash flow loans come with serious drawbacks that can hurt future cash flow and keep businesses in a cycle of automatic cash flow loans.

Personal Guarantees

Cash flow loans can be risky business for borrowers. This type of loan is considered a secured loan backed by future sales. You are required to give up a percentage of your future sales as repayment. What’s more, lenders usually seek to secure their investment by putting a general lien on the entirety of your business as well as a personal guarantee for the loan you receive.

If your business doesn’t generate enough money to pay back the loan, you become personally liable for repaying the loan.

High Interest Fees

Cash flow loans come with high interest rates to make up for the risk cash flow lenders are taking. According to Bloomberg Businessweek, the average interest rate of a cash flow loan comes out to a 54% APR. Compared to banks who charge 7% - 9% and reputable lenders coming in at 10% - 20%, cash flow loans come with extremely high costs.

More Fees

Besides the high interest fees that come with cash flow loans, lenders often charge heavy origination fees. These typically range between 2% to 3% of the amount borrowed, which results in more costs for the borrower.

Automatic Payments

Since cash flow loans are also risky for lenders, they aim to double-down on making sure to not lose their investment. Therefore, payments are not actively made by the borrower, but rather get drawn from your business’ bank account at least once a week. This results in weakened cash flow in itself, and soon you will find yourself looking for another cash flow loan.

Giving Up a Percentage of Future Sales

An alternative repayment option is giving up a percentage of future sales. This may sound like the better alternative when it comes to repaying the loan, but when money is taken out of your sales, you might be left with very little to cover your other expenses in order to keep your business up and running. Both of these payment options hurt cash flow and might leave you desperate for more loans, creating a vicious cash flow loan cycle.

Asset-Based vs. Cash Flow Loans: What’s the Difference?

Businesses may take advantage of an array of loan options to keep operations running and to reduce cash flow problems that come with seasonality. These can be either unsecured or secured.

Unsecured loans are not backed by collateral or future sales, whereas secured loans are. Cash flow loans and asset-based loans are both considered secured loans, but there is a difference between the two. Cash flow loans, as discussed above, are secured by future cash flows of the business. Projected future incomes of the business are considered when determining if a company receives such a loan.

Unlike cash flow loans, asset-based loans are backed by common assets that can be liquidated, or turned into cash, within one year. These assets can include inventory, accounts receivable and other balance sheet assets as collateral. Although cash flows are considered by lenders, they are not the main determinant to making a decision.

When the company cannot repay the loan, the lender can claim the assets and sell them in order to recover the amount of the loan. Asset-based loans are a great option for companies experiencing rapid growth but lacking the funds to support it, without having to give up equity or a percentage of future sales. This ensures that you have enough cash on hand to continue running your business without worrying about how you’ll be able to pay to keep afloat. Instead, you can focus on your brand’s growth.

Is a Cash Flow Loan Right for My Business?

Now that we have discussed the pros and cons of cash flow loans, here are a few things to consider before opting for one:

Not enough inventory / AR

Cash flow loans can be a good option if your business does not have a lot of inventory or AR that could be used as collateral in the underwriting process to obtain an asset-based loan.

Struggling to stay afloat

If you find yourself in the position of needing fast cash for your business to cover your day-to-day expenses, a cash flow loan might be the solution for you. The funds could become available within 24 to 72 hours.

Entering a slow season

Seasonality can weigh heavily on your business’ cash flow. This type of loan can relieve some of the pressure by providing you with capital that can be used to overcome slow seasons and keep your business afloat.

Getting Started with Cash Flow Loans for Small Businesses

Now that you know what the benefits of cash flow loans are, and you are aware of the drawbacks, here are some key takeaways and ways to get started with obtaining a cash flow loan for your brand.

The application process is straightforward and fast

No inventory is required as collateral in order to secure a loan

High interest rates (up to 134%)

Personal guarantees make you liable for the balance if your business can’t pay it off

Businesses give up a percentage of future sales

Keep in mind that if your emerging business has inventory and AR to lend against, asset-based loans might present a better opportunity for your business. Interest rates are much lower and no percentage of sales or equity is taken away from the business’ owners.