There are many situations a small business faces where there could be cash flow fluctuations or temporary interruptions of cash flow. For example, tomorrow is payday for your employees, but your customer is only going to pay you next week. Or, your business is just starting to take off and making its initial profits, but you need more money to sustain operations.
There are hundreds of situations where small owners constantly struggle with cash flow. When this happens, businesses have the option of using cashflow finance loans.
What is Cashflow Finance?
This is a type of business loan that covers working capital requirements. This type of financing is focused on helping businesses tide over temporary underfunding or sudden, unexpected business expenses that are necessary for the business to grow.
The idea of this type of financing is not to help a failing business stay afloat. It is to help growing businesses have enough money to carry out day-to-day operations and achieve profit targets after paying for overhead expenses.
When Should You Turn to Cashflow Financing?
Cashflow financing is perfect for your business if you need money because you are temporarily underfunded or have a big expense related to business growth, and are expecting money to come in soon. This is also a good option for your business if you do not have a significant asset to put up as collateral for a secured loan, do not have an established record of profitability or your business does not have a credit history.
How is Your Capacity to Pay Assessed?
Then you opt for a cashflow financing option, your lender does not look at your credit history as much as your cash flow history. The financier assesses your ability to pay back the loan based on your business’s ability to generate a positive cashflow.
Thus, when you apply for cash flow financing, you will be asked to show:
- Your business’s bank statements
- Your business-related credit card transactions
- Seasonal sales figures
- Your business’s expenses
- What your revenue is from returning customers
- Customer reviews about your business
Other Aspects to Keep in Mind about Cashflow Finance
Cashflow financing is basically a form of unsecured loans, so keep in mind that you will pay higher interest rates that you would for a secured business loan. You will also pay higher origination fees or upfront processing fees than you would for traditional business loans.
Added to that the term of the loan is much shorter than a regular business loan, usually between 6 months to 2 years.
Repayments are usually fixed amounts spread over a period of time. However, there are times when lenders will be willing to opt for a percentage of your business sales until the loan is completely paid off.
Cashflow finance can help you make it past that stage where cash flow is not yet steady but you know your business is doing well and has the potential to grow.