Sometimes you need quick access to additional funding to support your business. Cash flow finance can provide an injection of cash into your business while you manage your businesses cash flow and budget for seasonal peaks and troughs. If your business needs a cash flow boost then a cash flow loan would be a great option for you in order to help you achieve your business ambitions.
Cash flow finance is an ideal solution for many issues you may come across while managing your company. This type of loan could also help take your company to the next level by supplying extra funds you may need or simply work as a short term loan to fill in a cash flow gap.
Building credit can be hard, especially when you are just getting started or you are recovering from financial difficulties. A cash loan might help you qualify for a loan that will supply you the capital you need while improving your credit. At the same time, you are also able to preserve the current cash in your account.
Cash flow financing is a different type of loan from asset based finance. Cash flow based lenders allow companies to borrow money based on their projected future cash flows of the company. This projected income is what will help grant the loan to be approved, and will also be the key aspect of your business that will help pay back the loan.
Balancing cash flow is a key challenge that all companies at some point struggle to get right, whether they’re just starting up or have millions of pounds in turnover, businesses can often be vulnerable to cash flow issues. Even the best-laid plans can still hit unexpected bumps in the road that leave them with more cash going out than coming in.
What is a business loan?
Business loans are similar to personal loans but they are specifically intended for business purposes. With this type of business loan, you can borrow a lump sum to help manage your business’s cash flow or expand your business.
In return for money, you agree to repay the entire sum to the lender plus interest. The interest rate is based on a number of different factors, including the health of your business and the amount you are borrowing.
What is cash flow?
Cash flow is the total amount of money flowing (being transferred) in and out of a business per month. High levels of cash flow does not necessarily mean high levels of profit or any profit at all. This also means that high levels of profit do not translate to a high cash flow.
At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate significant positive cash flows and be able to maximise it, long term. It can often seem in some businesses like cash flow only goes one way (out of the business) however, it is necessary for a business’s finances to flow healthily in and out of the business.
Cash flow vs real cash
With some businesses such as restaurants and retailers, their cash flow is derived from real cash (paper money and currency). These types of businesses primarily take cash from their customers. This can make it hard to track cash flow especially since there are no invoices or set paperwork to track income.
It may help you to think of your business’s cash flow as your company’s personal debit account. If there is more money coming into the account than going out, then you are in a positive cash flow situation. This allows you to be in a great situation towards your shareholders and to pay your bills and maybe even generate some profit. If there is more money going out than coming into your account, you are in a grave danger of being overdrawn. Unlike a debit account, if this happens to your business, you will need to find a source of finance to cover your ‘overdrafts’.
What is Cash flow finance?
Cash flow finance is a form of short-term funding. It is a form of financing in which a loan is made to a company and secured on the basis of the company’s projected future cash flows. The ‘short term’ aspect of this type of finance is very important. These kinds of loans can especially help businesses’ when they need access to immediate finance during lean times. They are not a long term viable solution for managing cash flow.
Cash flow finance is especially helpful to companies that generate a significant amount of cash from transactions and have a lack of physical assets such as estate or equipment that would usually be used as collateral for a loan.
The projected or expected cash flow of your business is especially important as this is the base of the loan entirely. A cash flow loan uses the generated cash flow from your business as a means to pay back the loan.
A major advantage of cash flow finance is that it is quick to obtain. Once you have secured the loan, you have to repay the loan with interest, over a short term. Cash flow loans are typically repaid within one to sex months. Naturally, the terms and conditions of repayments tend to vary from lender to lender.
With cash flow finance you are able to borrow anything from a few thousand pounds and higher. If you qualify, there are some lenders that are willing to allow you to borrow a few hundred thousand pounds, usually this is decided almost entirely on your company’s projected cash flows.
What can cash flow finance be used for?
- To purchase new premises
- Unexpected bills
- Management buy out
- Hiring new staff
Calculating cash flow
It’s easiest to think of cash flow as the net amount of cash moving into and out of a business at any given time. A business’s liquidity, flexibility and overall financial performance can be shown by performing a cash flow analysis.
While this is the case, there are multiple ways to calculate cash flow. The cash flow formula you need to use depends on what type of analysis you are looking to perform.
There are four formulas you can use to calculate cash flow:
- Cash flow = cash from operating activities +(-) cash from investing activities + cash from financing activities.
- Cash flow forecast = Beginning cash + Projected inflows – Projected outlaws
- Operating cash flow = Net income + Non-cash expenses – Increase in working capital
- Discounted cash flow (DCF) = Sum of cash flow in period / (1 + discount rate) ^ Period number
There are a number of different formulas you can use when it comes to your business accounting. Using automated accounting or booking softwares to make conjuring reports and financial calculations can help you do them quite simply.
What is a cash secured loan?
A cash secured loan is one that you get qualified by depositing funds to your lender. As you have effectively given a deposit, the lender would already have a guarantee from you. This means that it will be easier for you to get approved for the loan.
With these types of loans, if you default on any repayments, the lender will be able to keep your deposit (or parts of it) to pay off your debt.
If you are not able to qualify for other types of loans, namely, any type of secured loans, cash loans may be able to provide a way to start improving your credit with the added advantage of being able to fund whatever you need currently within your business.
Secured vs unsecured loans
Many businesses at some point need to rely on borrowed capital in order to achieve certain goals or to simply remain afloat and continue to operate. There are various options for a business to gain the capital it needs however, some options can be more complex than others.
There are a multitude of options including business loans such as personal loans. They can be secured or unsecured. Financial institutions can offer a wide range of lending provisions within these two broad categories to accommodate every individual and their business.
With a secured loan, the lender can take possession of the collateral that you put as up security if you do not repay the loan as and when agreed. An unsecured loan differs as it is not protected by any collateral. If you do default on your repayments, the lender cannot automatically take possession of your property or assets like they can with a secured loan.
With a secured loan, you ‘secure’ the money you’ve borrowed against an asset that you own (collateral). If you are unable to pay back the loan, the lender is able to repossess the asset to make up the money that was borrowed. Whereas with an unsecured business loan, there is no form of security collateral. The only thing asked from an individual or a business is a personal guarantee.
Which type of loan is right for you? Secured or unsecured?
There are a couple of factors that go into deciding which type of loan will be best for you and your business. Usually, secured loans are a lot easier and quicker to obtain and, therefore, are a much more convenient option for immediate funds, as there is significantly less risk to the lender. If a lender sees you as a risky borrower because of certain factors such as a poor credit history, it may be harder for you to obtain such loans. If you have a poor credit history or you are rebuilding credit, it would be a better option for you to consider a secured loan rather than an unsecured one.
An unsecured loan is issued solely based on the lenders support and credit worthiness of the individual borrower. Typically, the borrower has to have high credit loans and often business plans will be also evaluated in order to be approved for an unsecured loan.
Secured loans tend to offer higher borrowing limits, enabling you to gain access to more capital. A secured loan often also has lower interest rates. This can mean that if you qualify for a secured loan, it is a smarter and more money friendly decision for you as opposed to an unsecured loan.
Why would you use cash flow finance?
Cash flow finance is a funding option to consider if your business finds money in short supply. This can happen at any time to most businesses no matter how big or small the corporation is. It typically happens as a small business begins to grow and build their customer base or if a business’s sales are dependent on income only generating seasonally.
You might also consider cash flow finance if you need an emergency injection of cash or you need to finance something temporary or make a quick investment in equipment or other general business needs.
Planning ahead usually allows businesses to avoid having to take out any type of unsecured loan. However, sometimes there is no way to plan for unexpected finance shortages. Therefore, preparing a cash flow budget helps businesses identify potential shortfalls you may face before it actually happens. In the event that you find you do need a quick, short term investment, cash flow finance can help your business significantly for a short term.
Cash flow finance costs
Like many other loans, there is likely to be a fee for the loan and they vary from one lender to another. Because of this, it is worth comparing loan terms with different lenders.
Another cost that you will face with cash flow finance is the interest payment you will be facing. They are usually quite a lot higher than you will find with traditional long term bank loans. This is due to the immediate funds you receive and after all, all lenders are still looking to make a profit.
Before choosing which loan is best for you, you must understand all the fees, interest rates and terms and conditions involved.
How long does it take to secure cash flow finance?
The biggest advantage of cash flow finance is that it can be obtained very quickly. However, you will need to provide a substantial amount of information to your potential lenders such as statements that provide information about your current and projected cash flows as well as evidence that you are an established business. Trading records, evidence of a well managed cash flow budget and detailed accounts will help you be approved. Some lenders may also want to run a credit check.
A crucial part of the process is for you to show your strategy for how to manage cash flow. This will be the most important part to help you get approved.
Assuming your business and records get approved for this type of financing, the decision can be made very quickly and the money will be in your account soon after.
What type of security is needed for cash flow finance?
Cash flow finance is almost always a type of secured loan. This means that the individual who applies for the loan will have to provide a type of security as collateral as a personal guarantee as the lender must mitigate the risk.
Cash flow loans usually do not use physical assets as security. Instead, they use a projection of the borrowing business’s future revenue. This is one of the reasons why you will need to provide so much background financial information.
The exact details of the loan term will vary from lender to lender, however.
Can I repay my loan early without any extra fees?
Any extra charges on your cash flow loan will be at your lender’s discretion. Usually, lenders will not charge any early repayment fees however, you will still need to settle the full amount owed. The terms should be indicated in your initial agreement.
Types of Cash Flow Finance
Working capital finance
Working capital loans are short term loans that provide a lump sum amount quickly. They can help cover everyday operating expenses such as wages or bills. They can be vital to a thriving business and are especially useful if your business is dependent on season fluctuations or slow paying customers.
Contract finance is the funding you need when your client is taking a long time to pay you, it is designed for companies that do not have the funds readily available. Waiting to get paid by customers can strain a businesses cash flow immensely therefore, with contract finance you are able to fund your business growth ambitions by releasing cash from your contracts when you need it.
If your business operates under contracts, contract finance acts as a financial safety net by advancing funds against your future contractual billing, so that when you want to pay your suppliers and staff or take on any new ambitious and potentially expensive projects, there is no need to wait to get paid from your customers first. Effectively, contract finance uses the value of your contract as the security for a loan.
Every aspect of our lives is affected by e-commerce. E-commerce funding is a type of finance designed to help small retailers grow. With an e-commerce business, the entire world is your marketplace however, unfortunately you will face a lot of challenges that traditional businesses face as well as the added unique bonus challenges linked to being a business in the online world.
Most lenders will not provide funding for start ups as your start up will have no trading history. As e-commerce is fairly new, some lenders may be prepared to consider funding based on your personal previous experience, credit and professional history.
Merchant cash advance
Merchant cash advance is proving especially popular with retail businesses and the leisure sector, it is also known as business cash advance, essentially funding from your card in your wallet. This type of funding can provide a simple way to deal with short term cash issues (seasonal lows) or to fund your business growth plans.
Put simply, a merchant cash advance gains access to your recent transactions and uses your card in order to secure lending. This is specifically great for businesses that do not have many assets but have a good volume of card transactions monthly. Merchant cash advances can provide cash advances which are typically equivalent to your monthly takings.
This advance is paid back automatically as your customers make card payments. This type of lending is a fairly new lending option within the last couple years. It provides small businesses funding when conventional lenders are reluctant to lend.
Purchase order finance
Cash flow issues can happen to any business especially those that are growing fast or who have big growth ambitions. Purchase order finance is funding advanced specifically to a supplier secured against a confirmed purchase order.
Purchase order finance is there to help businesses by assisting with the financing of a specific transaction until the time that an invoice is raised. In order to qualify for this type of funding the purchase order will need to have come from an established and financially secure customer. Your lender will need to ensure that the buyer is in a position to pay for the goods once they have been completed.
Single invoice finance
There are various types of invoice finance. They are designed to help your business grow, expand and solve any cash flow challenges by helping you get paid faster. Single invoice finance provides cash advances with your invoices as the security.
This type of finance allows businesses to get an advance on the cash that is due from their existing customers, without having to wait for their customers to actually pay. It is a form of finance that leaves the borrower in control and lets you raise the funds as and when you need them.
This would be a particularly good option if your business has no long term funding requirements, but may be faced with high value orders and long credit terms which could leave you faced with a temporary cash flow shortfall.
Supply chain finance
Every business has a supply chain. Working capital is critical to every business. A supply chain is a succession of businesses that depend on one another. Your customers cannot function without you and your business cannot function without its suppliers. Therefore, when there is an issue with this supply chain, cash flow problems occur.
Supply chain finance works as an external source of funding that allows buyers to extend supplier payment terms. This frees up cash and optimises current business cash flows that would be otherwise trapped within the supply chain.
Whole ledger finance
Whole ledger finance provides a loophole to be able to get the money you need as a business sooner. This type of finance ensures that you do not have to wait for customers to pay meanwhile your business gets an advance on all the cash you are due from those customers. Therefore, rather than waiting 30 or 60 days or maybe even more for payment, with whole ledger finance, you are able to get the funding you are owed a lot sooner, straight into your bank account.
Download our free Cash Flow Forecast Template
Using this cash flow forecast template, you can better plan and manage your business’s working capital.
Simply fill the spreadsheet in with your business’s details and you will be able to see a forecast of your cash flow over then neat 12 months.
See how much you can raise
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