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For some small business owners, it might feel like cash only flows one way – out. But, cash flow is the net amount of cash coming in and out of your business. The cash flow of your business paints a picture of the health of your company. Your business might have great sales numbers but if customer payments are coming in late, cash flow can turn negative.
Cash is king and without it, your business is DOA. As a small business owner, it’s not uncommon to find yourself in a situation, good or bad, where you need a little extra injection of cash. To find that money for their businesses, small business owners often look to cash flow loans.
What is cash flow lending for businesses?
Cash flow based lending is different from conventional asset-based or secured business loans because it doesn't require you to put your business’ assets up as collateral. Conventional business loans have a lengthy application process that reviews a business’ credit history, assets, and investments, in addition to cash flow. Although these loans can have more favorable APR, the application process is long, it requires more documentation, and many small businesses are still turned down, especially new small businesses who don’t have enough assets or credit history.
On the other hand, a cash flow loan looks at a business’ past and potential cash flow, and not just their assets and credit score. Cash flow loans might not be able to compete with traditional loans in terms of loan amounts or APR but the application process is usually quick and easy, and the cash is funded extremely quickly, sometimes in just one day.
Depending on the type of cash flow loan you take out, you may pay back the lender a percentage of your sales or a predetermined amount in daily, weekly, or monthly installments. Since cash flow loans are unsecured and considered higher risk from the lender’s point of view, a borrower’s repayments are usually made more frequently than compared to a conventional loan and usually through a direct deposit.
Temporary Cash Flow Issues?
Cash flow loans can be the perfect solution for the small business that needs a quick boost of cash to solve a short-term cash flow problem.
Help a new business grow:Cash flow loans can help a new business with quick access to additional working capital to allow them to have enough cash for day-to-day activities when a new business is just establishing itself.
Assist an established business through a rough patch:Sluggish sales, supplier issues, or even unexpected employee turnover can negatively affect a small business and temporarily hurt cash flows. A cash flow loan can provide a cash cushion to a business who is facing a temporary rough patch.
Smooth out a seasonal business’ cash flows:Sometimes seasonal businesses are caught off guard as they transition from their peak to off-peak seasons. For example, a fall or winter cash flow loan might be just the solution for an ice-cream shop that relies heavily on summer tourists.
Provide quick cash to solve an emergency problem:A burst pipe or equipment failures always seem to happen at the worst possible time. A cash flow loan can help your small business fix an emergency problem and get you back to work quickly.
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When Business is Booming
Cash flow loans aren’t only for when times get tough and cash flow turns negative. They’re often a smart strategy even when a small business has a positive cash flow. Small business owners might walk into a rare opportunity like finding raw materials at rock-bottom prices or even the chance to take their brick and mortar store online. A cash flow loan can provide you with quick financing to help you seize special opportunities that won’t last long.
Another common situation where a small business can benefit from a cash flow loan is when they pursue invoice or contract financing. Small businesses that have recently received a large order can use an influx of cash to buy supplies, ramp up production, and complete their orders. Likewise, as part of the bidding process for large government or commercial contracts, a small business might need to show that they have the means to secure materials or services to fulfill the contract. A cash flow loan relieves small business owners from the stress of waiting for their invoices to be paid.
Is Cash Flow Finance for Small Business Right For You?
You know your small business better than anyone else. Just because a lender might qualify you for a cash flow loan doesn’t mean you should take one. Ideally, cash flow loans should be used to finance activities that will add positive cash flow to your business, in the near future. For much larger or long-term investments in your business, a conventional business loan with lower APR and longer repayment terms might make more sense.
There are many factors to consider when evaluating loans for small business owners. One of the most important factors to consider is the total APR and other fees you would pay to borrow cash. You don’t want to get in over your head, so, you’ll want to make sure your future cash flows can repay the principal and interest of the loan in the required amounts and schedule as required by the terms and conditions of the loan.
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This communication is provided for informational purposes only. It is not intended to be an advertisement, a solicitation, or constitute professional advice, including legal, financial, or tax advice, nor is StreetShares providing advice on any particular situation.