Cash Flow Financing
Cash flow is the total money coming into and out of a business (or the flow of money in the form of revenue and liabilities that happen during the course of a month). A company Cash flow is distinctively different than net revenue, as net revenue relates to total revenues minus liabilities. But there are other ways a company may bring in cash, but not relate to sales (an example would be loan proceeds). Cash-flow may vary for some companies based on seasonal factors, or other factors in the business cycle do to a variety of reasons. In this article we will look at the financing options available to both help companies with cash flow, but also use their company’s past and expected cash flow to obtain financing.
What is a Cash Flow Loan?
A cash-flow loan is a way for a small or mid-sized company to use their expected future revenue and past cash-flow as a way to get a business loan. A cash flow lender will examine a company’s bank statements and/or credit card processing transactions for the total cash-flow coming into the company. If a company has decent cash flow (but maybe not profitability) a lender may lend up to 200% of the company’s total deposits into their bank accounts and credit card processing statements. Since the cash flow lender is mostly focused on total cash flow, they are less concerned about credit of the business and business owner, and may not care about collateral at all. In fact, almost all cash-flow loans are unsecured (in the sense they don’t require commercial real estate or other specific types of collateral) but there are hybrid lenders that can offer cash-flow loans that are enhanced with the use of commercial and personal property.
How Does a Cash Flow Loan Work?
Cash-flow loans work differently depending upon the type of cash flow lender you apply with. All lenders will begin by requiring a credit application so they can run credit. As mentioned earlier, having good credit isn’t a requirement for most cash flow lenders, as they focus more on revenue that credit history. If the business shows sufficient credit and doesn’t have any disqualifying incidents (defaults, current bankruptcy, etc) the lender will then move on to examining the company’s cash flow. By looking at a company’s main operating bank account statements and/or the company’s credit card processing statements, the lender will get an idea as to how well the company is cash-flowing each month. The lender will analyze the company’s cash flow by looking at total deposit amount, number of deposits into the bank account, daily average balance, minimum monthly balance, number of bounced checks and insufficient funds, number credit card processing transactions, total credit card deposits, etc. After analyzing the data over past 3-6 months, the lender will then calculate how much they feel the small business will be able to payback comfortably on a daily basis. From there, the lender will then multiply that amount by a term ranging from 3 months up to 60 months, and supply that amount to the merchant or business in the form of a loan or advance. Repayment for a cash flow loan is made either on a daily, weekly or monthly basis in forms including regular monthly payments, or by daily or weekly remittance via bank account ACH or through remitting a percentage of each day’s credit card transactions until the loan is fully-repaid.
Cash Flow Loan Pros
There are a number of advantages of cash flow loans, especially for company’s that may lack profitability or have credit that won’t allow them to get approved at a bank. For company’s locked-out of traditional financing, a cash-flow loan offers fast financing (1-5 days depending on type) as opposed to months with conventional lenders. A company only needs to show minimal documentation for a cash flow loan (often only application and bank statements) as opposed to traditional financing which requires extensive documentation. While a lien will be placed on the business when financing occurs, no specific collateral is needed to get approved for funding. A company only needs to be in business for 6 months to get approved for some cash flow financing types, where a bank would require a company be in business for at least 2 years.
Cash Flow Loan Cons
A general downside of most cash-flow loans are the rates and terms offered. As compared to conventional bank loans, a cash flow financing can be expensive – sometimes extremely expensive. Since these lenders are focusing on past bank account cash flow, there is a risk that future performance may not live up to the past. Therefore the lenders are taking increased risk – and such risk will be priced into the loan or advance in the form of higher interest rates, higher fees, and shorter terms than conventional lending.
Cash Flow Loan Uses
- Working capital – Having capital to handle day-to-day operations is essential for all businesses. Having access to fast working capital may be the difference between taking advantage of business opportunities, and missing payments to vendors, suppliers, etc.
- Expansion – Sometimes a business sees an opportunity to move into a new space, or expand the space they have, but don’t have the immediate cash to take advantage of the opportunity. In those instances using their expected future revenue to obtain financing may be an option worth pursuing.
- Advertising – having a great product or service does you no good if customers are unaware of what your business has to offer. Dedicating some money toward advertising and marketing may go a long way toward increasing revenue and profits.
- Payroll – a requirement that simply can’t be overlooked for many companies. Missing payroll is simply not an option, and a cash flow loan may help ensure all employees are paid on time.
- Tax obligations – While no one enjoys paying taxes, when the IRS demands payment, your business needs to comply. Having a cash-flow funding facility may help keep the government from shutting down your operations.
- Emergency expenses – regardless of how detailed your business plan is, there will always be surprises and occurrences during the business cycle that requires emergency and immediate financing.
Types of Cash Flow Loans
|Line of Credit||5-15%||1 – 3 years||7-30 days|
|Alternative||6-25%||1-5 years||5-7 days|
|Cash Advance||1.16-1.55||3-24 months||1-3 days|
Alternative Cash Flow Loans
Alternative cash flow financing is a type of loan offered by non-bank lenders where they focus on the company’s cash-flow when deciding upon funding. Most of these lenders provide online approvals that take just minutes, and then decide on pricing and term after analyzing the company’s bank statements and Profit & Loss statement over past two years. Debt service coverage ratio needed for this type of financing is usually 1.0, meaning the company must show it has the ability to pay off the loan through net profits over past year. Alternative lending is much faster to fund that traditional financing, with funding happening within a week or so of the initial application. Unlike cash advances, these are true loans with a real APR — even if the rate isn’t as low as one would see with traditional financing.
- Rates: 9-25%
- Terms: 1-5 years
Cash Flow ACH Cash Advance
There are a number of reasons why a company wouldn’t qualify for bank-rate or alternative financing, including bad credit, lack of profitability, short time in business, etc.. If you can’t qaulify for other forms of financing, another form of cash-flow financing worth considering is selling future revenues to your company’s bank account for immediate funding. ACH loans are the sale of a small business’s bank deposit revenue at a discount. Virtually any company can qualify for an advance, but the risk is priced into the funding — meaning the more risk the lender takes, the more expensive the rate will be for the borrower. To qualify a company only needs to supply a credit application and six months bank statements. Approvals take about an hour, and funding can take place quickly — even the same day. After the company is funded, the business cash advance ender will then take a set amount from the company’s bank statement on each business day (or sometimes on a weekly basis) until the loan is fully-repaid.
- Factor Rates: 1.16-1.50%
- Terms: 4 months – 2 years
Cash Flow Merchant Cash Advance
A merchant cash advance is similar to an ACH loan in the sense that its also the sale of future revenue at a discount to the lender. The main difference is how the loan is repaid; a merchant cash advance is repaid by the lender collecting a percentage of each day’s credit card sales, as opposed to a set amount deducted from their bank accounts.
- Factor Rates: 1.16-1.45%
- Terms: 4 – 21 months