Cash flow loans explained

Managing cash flow is one of the biggest challenges for small and medium-sized businesses. Even profitable companies can struggle if money isn’t available to pay bills or if customers pay invoices late. 

However, a cash flow loan can help bridge this gap and provide quick access to funds to cover day-to-day expenses, as this guide explains.

At a glance

• A cash flow loan helps businesses manage short-term gaps between money coming in and money going out

• When considering your application, lenders focus more on the future income of your business than its credit history

• You don’t need to provide collateral to secure a cash flow loan, although you may need to sign a personal guarantee

• You must typically repay a cash flow loan within one to 12 months

• You can use a cash flow loan to cover unexpected expenses, pay staff wages or stock up on inventory

What is a cash flow loan?

A cash flow loan is a type of unsecured finance that you can use for the day-to-day operations of your business. However, unlike many other types of business loans, the approval of the loan depends on your business’s future income streams, such as sales and invoices, rather than the size of your business assets or the strength of your credit score. 

This means you don’t need to undergo a lengthy application process, and you should receive the funds quickly (often within 24 to 48 hours), so you can cover urgent costs. 

How do cash flow loans work?

If a lender accepts your cash flow loan application, they tell you how much you can borrow and how soon you need to repay the funds. Borrowing sums are usually smaller than other loan types and loan terms are shorter, often no more than 12 months. 

The amount you repay each month depends on your business’s cash flow. You might pay fixed repayments, or they might fluctuate to reflect your business’s sales performance. 

Note that while there is no need to use collateral to secure a cash flow loan, interest rates and setup fees tend to be higher as a result.

What are cash flow loans used for? 

You can use a cash flow loan to:

• Pay your staff or suppliers

• Cover unexpected expenses

• Stock up on inventory to continue trading

• Keep day-to-day operations running without disruption

What are the advantages of cash flow loans?

There’s a range of advantages to cash flow loans, including:

• Speedy application process – You can apply for a cash flow loan relatively quickly and sometimes receive the funds the very same day

• Easier to access – If you have a poor business credit score, it can be easier to secure a cash flow loan, because lenders tend to focus more on whether your business can bring in enough money to repay the loan

• Flexibility in use – You can use the funds from a cash flow loan for a wide range of purposes

• Tailored to cash flow – Lenders may link your repayments to sales or invoices, enabling you to repay the loan in line with your revenue cycle

• Smooth out cash flow – A cash flow loan can help bridge a short-term gap in cash flow, which can be particularly useful for businesses with seasonal income

What are the disadvantages of cash flow loans?

Before deciding whether a cash flow loan is right for your business, it’s important to consider the disadvantages, too: 

• Higher fees – Because you pay back a cash flow loan over a shorter term, the interest rates and fees tend to be higher than for other types of business finance

• Shorter terms – Cash flow loans must be repaid quickly, so this can put additional pressure on a business’s finances

• Personal guarantees – Although you don’t need to use collateral to secure your loan, you may have to sign a personal guarantee, making you personally responsible for repaying the debt if the business can’t

• Risk of dependency – Using cash flow loans too often could mask deeper cash flow problems

Who is eligible for a cash flow loan?

To qualify for a cash flow loan, you must usually be over the age of 18 and a UK business owner. This can include limited companies, limited liability partnerships and sole traders. 

Some lenders may ask that you’ve been trading for a set time, and all will want to see a strong revenue record. Lenders typically ask to see cash flow projections and financial statements to help determine your ability to repay the loan.

How are cash flow loans different from traditional loans? 

The key difference between cash flow loans and traditional business loans is the basis of approval. With a cash flow loan, a lender typically considers your revenue streams, profit and loss statements, and ability to generate cash. But with a traditional loan, lenders look at whether you have sufficient collateral, such as property or vehicles, and whether you have a healthy credit history.

You should find it easier to secure a cash flow loan compared to a traditional loan, but bear in mind that cash flow loans are typically more expensive. 

Alternative business finance options

Before deciding whether a cash flow loan is right for your business, consider these popular alternatives to see if one is more suitable: 

• Business credit cards – Like a personal credit card, you can borrow up to your set credit limit as required and make flexible monthly repayments. If you pay the balance in full each month, you avoid paying interest

• Business loans – Borrow a lump sum of cash over a fixed term. You pay back the loan, with interest, in monthly instalments. Choose from secured and unsecured options 

• Merchant cash advances – The lender provides an upfront loan based on how much your business makes from card sales each month. You repay this amount, plus fees, through a percentage of your card transaction sales

• Invoice finance – Borrow up to 95% of the value of your customers’ invoices and repay this amount once your customers have paid up

• Business line of credit – This is a revolving credit facility that lets you borrow up to your limit when needed. You only pay interest on the amount borrowed, and once you’ve repaid it, the funds become available again

Read more …

• Business loans explained

• Am I eligible for a business loan?

• How to get a business loan?