Cash flow is what keeps your business moving. If you can’t access working capital, you’ll struggle to grow your business. 

When working capital is stretched, most business owners consider a bank loan. But strict lending criteria and a slow approval process mean this type of business finance often isn’t the best option. 

A recent poll by RFI Global revealed that 70% of SMEs in the Asia-Pacific were less than satisfied with access to credit provided by their main bank.

Cash flow finance may be a quicker and easier alternative. 

What Is Cash Flow Finance?

Cash flow finance is a type of business funding that allows you to borrow against your future business revenues. The financing can be structured in a number of different ways to suit your particular needs.

Applying for a traditional bank loan can be clunky and slow. This is because banking institutions focus on eligibility criteria such as credit scores, company age, and financials. You’ll also need to use your residential property as collateral in most cases.

Cash flow lending providers judge the ability of your business to repay the loan based on revenue projections. This can be based on a percentage of future credit card transactions or unpaid invoices. Alternatively, some lenders will offer a line of credit to help with cash flow or a loan with a fixed repayment term.

Different Types of Cash Flow Finance

There are several types of cash flow loans, each with different funding and repayment structures. 

Once you understand the different options, you’ll be better positioned to choose the right solution for your business.

Invoice Finance

Invoice Finance, also known as Debtor Finance, is a type of funding that allows a business to release the cash tied up in its outstanding sales invoices. You don’t need to provide any additional collateral other than the invoice you want to fund. 

Instead of waiting for your customers to pay an invoice, you can submit it for financing and receive up to 95% of the invoice value as a cash advance. Once your customer pays the invoice, you receive the remaining balance of the invoice, less fees. 

There are many different types of Invoice Finance, with some facilities including additional services like collections and account management. 

The cost of invoice finance depends on the type of facility, the creditworthiness of your customer, and other factors. You can learn more about the fees involved in our guide, The Costs of Invoice Financing Explained.

Business Line of Credit

A business line of credit is a flexible form of cash flow lending. These are issued by banks and other lenders and work in a similar way to a business credit card. The line of credit will allow you to draw cash up to an agreed credit limit. 

The primary advantage of a line of credit is that you only pay interest on the amount you spend. It can provide ongoing access to working capital to cover your company’s cash flow needs.

Most business lines of credit are secured. Depending on the lender, you may need to provide property or business assets as collateral. Some lenders also charge ongoing fees as part of the funding facility. 

Short-Term Business Loans

A Business Loan has a set repayment schedule and is offered as a one-time lump sum. The interest rate can be fixed or variable, and you may need to provide collateral to secure the loan.

Business Loans are usually repaid in instalments over a set term. Short term loans typically allow borrowers to pay back the finance for up to three years.

A Business Loan can be a good option for one-off expenses, but they are often unsuitable for business cash flow needs. You will need to pay interest for the whole sum secured at the outset, regardless of whether you spend it all. Many Business Loans also come with rules regarding how you can use the funding.

Merchant Cash Advance

A merchant cash advance is not like a standard cash flow loan. Instead, the lender will provide a specific cash amount based on future credit card sales revenue projections. The borrower will repay the loan via a predetermined percentage of their credit card sales.

The application process for a merchant cash advance is usually fast. You can get the financing in 24 hours if you prepare your paperwork first. You may also be approved for a loan amount worth up to 70% of your average monthly credit card sales revenue.

The repayment process for a merchant cash advance is automatic. Each time a customer pays using a credit card, a percentage of the amount automatically goes to the lender. 

This would work for an SME with a high volume of card sales but would not be suitable for seasonal businesses or those with variable monthly sales revenues.

The cost of a merchant cash advance is also typically higher than other types of business finance. 

You can learn more about this type of funding in our guide, The Pros and Cons of a Merchant Cash Advance. 

Cash Flow Finance vs. Asset-Based Finance

Cash flow finance is primarily based on sales performance and projections. Potential lenders typically review your company’s transactions and other data to determine your ability to repay the loan.

Asset-based lending is a type of business finance that uses residential property or business assets as collateral to secure the funding. The lender will put a greater emphasis on the property and assets a company owns.

There are several other differences between these types of financing. 

Cash flow loans typically allow you to access money quickly, as the lender doesn’t have to appraise the asset before they can provide funding. Someasset-based lenders can take several weeks to review an application and provide funding. 

With cash flow finance, you can be approved and receive funding in as little as 24 hours. Generally, the repayment terms will also be shorter than many asset-based lending products.

Cash Flow Finance and Bad Credit

Cash flow finance is generally more accessible than asset-based finance. You may still qualify for cash flow lending even if your credit rating isn’t perfect or you don’t have a long trading history. 

Lenders will look at your business’s sales performance and revenue projections to determine your ability to repay the funding. With Invoice Finance, the lender will review the creditworthiness of your customer before agreeing to fund an invoice.

Which Type of Finance Is Right For My Business?

The right type of funding for your business will depend on your unique circumstances. Each solution has advantages and disadvantages, and some are more accessible than others. 

If you need cash quickly, then Invoice Finance or a merchant cash advance can be much faster to arrange than a term loan or line of credit. 

It also depends on how you want to access the funds. For example, do you need a lump sum, or would you prefer a facility that you can access as and when you need it?

If you want to use the funds for a one-off large business purchase, you may find that Equipment Finance is the better option. 

You also need to make sure the funding will meet your ongoing needs. It can be helpful to create a cash flow forecast to gain a better understanding of your current and projected cash flow.

ScotPac Cash Flow Finance Australia

If you need to cover an unexpected cost or raise funds to invest in growth, cash flow finance can provide access to working capital when you need it most.

Here at ScotPac, we provide straightforward business finance solutions. We’re experts at unlocking value and helping Australian SMEs get the funding they need to succeed. 

Our team of business finance experts can help you find the right funding solution and tailor a facility to your needs. Call us on the number below or fill in our online enquiry form to receive a no-obligation quote.