A cash flow loan can protect your working capital and provide the cash injection you need to plug a gap in your business finances. It’s a fast and convenient way to cover an unexpected bill or fund a period of rapid growth.
But there are lots of different types of cash flow loans. Some are more affordable and accesible than others.
In this guide, we’ll explore the different cash flow loan options, what you need to qualify, and how to apply.
What Is a Cash Flow Loan?
A cash flow loan is a broad term that covers a range of finance products designed to support working capital requirements by leveraging a company’s expected future earnings.
This type of financing is beneficial for growing businesses, those with no real estate collateral, and companies that need to raise funds quickly. Cash flow loans are usually repaid using incoming cash flows rather than set monthly repayments.
How Do Cash Flow Loans Work?
In simple terms, a cash flow loan allows a business to access funding based on the value of its future earnings.
The finance company will use projected sales revenue, accounts receivables, or historical performance to determine how much you can borrow. Because the funding is based on future earnings, you can often access cash flow financing even if your credit score isn’t perfect or you don’t have a long trading history.
According to a recent survey, 37% of Australian SMEs have found it more challenging to access funding since the start of the Covid-19 pandemic, with 26% saying they had been rejected for finance.
Cash flow loans are much easier to qualify for than a traditional business loan. The application process is much faster, there’s no need for real estate collateral, and you can get approval and receive funding in as little as 24 hours.
When Is a Cash Flow Loan Useful?
A cash flow loan can be beneficial if you:
- Need fast funding to cover an unexpected cost
- Want to fund a growth project without damaging working capital
- Experience seasonal sales
- Need to cover cash flow gaps caused by extended payment terms/late-paying customers
- Want to negotiate bulk purchase discounts with suppliers
- Need to cover payments to suppliers due to spike in demand
What Do You Need To Qualify for a Cash Flow Loan?
Unlike a traditional business loan, cash flow loan providers typically do not require any real estate collateral. You don’t need to risk your home to secure funding.
You will need to provide up to date financial statements to show the financial health of your business. Because the funding is based on your future cash inflows, the lender will focus on your accounts receivables and your cash flow forecast to see if you qualify.
With Invoice Finance, the lender will want to see the payments history of your customers to see if they pay invoices on time.
4 Best Cash Flow Loan Options
There are several different cash flow loan products available to Australian businesses. The right solution for you will depend on your unique circumstances and the reason for seeking funding.
Let’s take a look at the pros and cons of the four best cash flow loan options so you can see which is the best fit for your needs.
1. Business Line of Credit
A line of credit can provide flexible access to funding to support working capital requirements. The lender will approve a credit limit that you can draw down as and when you need.
As you make repayments and clear the balance, funds become available again. You are only charged interest on the amount borrowed, but some lines of credit are subject to a monthly facility fee.
However, a line of credit is typically secured using real estate collateral.
An alternative solution is to combine a line of credit with an Invoice Finance facility. You can use your unpaid sales invoices as collateral for the line of credit. As you raise new invoices, the line of credit increases. This means your access to credit rises in line with the growth of your business.
2. Trade Finance
Trade Finance is a type of cash flow financing designed to support import/export and domestic trade transactions.
If you buy from overseas, a Trade Finance facility can provide funding to pay your supplier and cover the cash flow gap while the goods are shipped and sold.
If you export to overseas customers, Trade Finance can provide the funding you need to pay your suppliers, manufacture goods, and cover the period it takes for your customer to pay.
This type of cash flow loan can benefit companies that struggle with capital being tied up in the supply chain for extended periods. For example, if you need to cover an upfront payment to a supplier, a Trade Finance facility can provide funding to cover a cash flow gap of up to 180 days.
3. Invoice Finance
If your business suffers from cash flow gaps due to extended payment terms or slow-paying customers, Invoice Finance can provide fast access to capital. Instead of waiting 30+ days for your customer to pay, you can get a cash advance of up to 95% of the invoice value.
When your customer pays, you get the remaining balance of the invoice less fees. This type of cash flow loan is one of the most popular in Australia. There’s no need for real estate collateral, and a facility can be approved and put in place in as little as 24 hours.
There are some drawbacks to Invoice Finance that make it unsuitable for some businesses. For example, the amount you can borrow is limited to the value of your accounts receivable.
You will also lose a percentage of your profit margin in fees. If you operate on a high volume low margin strategy, this could affect your bottom line.
If you want to learn more about this type of cash flow lending, read our guide, What is Invoice Finance?.
4. Merchant Cash Advance
If you sell direct to consumers, a merchant cash advance can provide a fast injection of working capital. This type of cash flow loan can be a good alternative for businesses that don’t qualify for Invoice Finance.
You can receive a cash advance based on the value of your future credit and debit card sales. The finance company will look at your historical and projected card sales to determine how much you can borrow.
The advance and interest are repaid as a percentage of your card sales. When you process a card transaction, a percentage of the sales value is automatically deducted. This means you don’t need to worry about making monthly repayments, but your daily cash flow will be lower until the advance, plus interest, is repaid.
A merchant cash advance can be a convenient cash flow loan option for some businesses, but it is also one of the most expensive types of business finance. You can learn more about this type of financing by reading our guide, The Pros and Cons of a Merchant Cash Advance.
What To Look For in a Cash Flow Finance Product
There are pros and cons to each type of cash flow loan, so it’s important that you choose the most suitable option for your company. For example, a line of credit can be difficult to qualify for if you don’t have real estate collateral, while a merchant cash advance can be an expensive way to fund your business.
You should also determine whether regular access to funding or a one-off lump sum will benefit your company more. For example, the flexibility of a revolving line of credit or Invoice Finance facility can be helpful if you experience regular cash flow gaps.
How to Apply for a Cash Flow Loan
While traditional bank loans and lines of credit are subject to strict lending requirements, cash flow loans are generally much more accessible.
The first step to applying for a cash flow loan is determining which product suits your needs. Our dedicated team of business finance experts at ScotPac are on hand to help you find the right cash flow financing solution.
We have over 30 years of experience helping Australian SMEs with simple funding solutions to complex business challenges. Give us a call or fill in our online application form, and we’ll work with you to get the funding your business needs to thrive.