When a business is struggling to pay a bill or to make an essential purchase, it typically has a cash flow problem. In this instance, cash flow loans can be useful for plugging the finance gap. But what exactly is a cash flow loan and what sort of business applies for one? Let’s take a closer look.
The need for financing
There are so many instances in which a business needs financing. Even the most experienced entrepreneurs and business leaders will find that cash flow can be a problem. It’s also a fallacy that cash flow problems only affect smaller or newer businesses because the most time-served and asset-rich firms can still experience these issues.
Why is cash flow so important?
A going concern
Cash flow keeps a business ticking over. Even a profitable business cannot stay in operation if it struggles with cash flow.
To secure finance
Cash flow allows businesses to secure finance when they need it. If a firm has insufficient cash flow, it can secure a business loan against its assets. This can then continue to flourish by using that cash flow to operate successfully. A good way to improve business cash flow is by using a business cash flow credit facility and then managing it carefully.
To attract investors
Operating cash flow is one of the key measures that investors look at in evaluating any business. Investors will look at net income and revenue too, using the three measures to identify how well a business is able to sustain revenue and to grow in the future. Remember that even a highly profitable business can fail if its cash flow is insufficient.
To manage the business proactively
When a business has cash in the bank it has opportunities to move ahead. For example, it may want to buy in external expertise, to invest in R&D, to launch a marketing campaign, to upgrade its software, to train staff and so forth. By having that essential cash, the business can move quickly to capitalise on such opportunities.
Good cash flow can support a healthy business If a business can keep a healthy cash flow, it can plan ahead for its future expenses and income and then flag up any possible problems. This forward-thinking helps to maximise profitability by allowing business leaders to put longer-term plans in place.
Good cash flow maintains a great reputation A business with healthy cash flow can pay its suppliers on time, pay staff on time and meet its financial obligations. This helps it to maintain a positive reputation which is essential in today’s challenging business environment.
What are the features of a cash flow loan?
Cash flow loans are designed to provide a working sum of money that allows the business to continue its operation without delay or issue. The loan is typically quick to turnaround and will not be for a huge sum. It is likely to have a short loan term or duration, meaning that it will be repaid quickly. In this way, the interest rate applied to the loan is likely to be competitive. Some businesses will use these types of loan as an alternative to a credit facility or overdraft and the loans offered will have flexible features that enable this.
What are the benefits of cash flow loans?
Cash flow loans will have a variable selection of features depending on the lender and the terms. When we offer a cash flow loan, it has these benefits:
It is meant to be a short-term loan that will be repaid quickly, so there will not be an onerous amount of interest applied. This makes it an affordable loan product.
It will be offered quickly and the funds can be transferred into the business bank account immediately upon acceptance.
It can be managed online – from the initial application form through to the ongoing account management, payment and balance viewing.
It doesn’t require meetings between the lender and borrower (at least in our case!) Many traditional lenders will still expect to have face-to-face meetings before approving any kind of work.
It doesn’t require a lot of paperwork or supporting evidence to apply for.
It can be offered with flexible features that meet each business’s unique needs.
Find out more
Our team of finance advisers are on hand to help you access the funds that you need to maintain a healthy cash flow. With years of experience and many happy customers, we are pleased to offer a wide range of business loans of different types, to suit each need. We are also proud to offer loans to 9 out of 10 of the business customers that apply to us for finance, having been turned away from traditional lenders. Please get in touch to find out more or complete the online application form for an instant decision
Ever wanted to find out more about cash flow loans? How they work and how to get one?
You’ve come to the right place.
In this episode of the Century Business Finance Hub, John and Ben delve into cash flow loans in their entirety, to equip you with the knowledge that will allow you to make an informed decision on whether cash flow loans are the most suitable financial solution for your needs.
So what exactly is a cash flow loan?
A cash flow loan is a short-term financial solution to a problem, whether a customer hasn’t paid you, you are on 30, 60, 90 day invoice terms and they’ve gone a little bit over and you need a short term solution or maybe you’re a bit short to pay your staff in the month. Cash flow loans are ideal to cover the everyday things that crop up in a business, when you need to bridge a gap.
Cash flow loans are usually taken over between three and 18 months maximum.
When might I need a cash flow loan?
When it comes to VAT and tax, there are different products available that you can use and there are particular funders that offer three to six month VAT and tax bill funding.
However, it is recommended that a cash flow loan is taken over a period of three to six months, when you’re approaching your busy period. For example, if you own a convenience store and Christmas is coming up, you may want to invest in more stock. This is because after three to six months, the money will start to come in. A cash flow loan is ideal as a short term funding solution that gets you from A to B.
There may be a misconception surrounding cash flow loans that they are a weird and wonderful product created by a creative banker. But essentially, it’s just an unsecured business loan over a short term, to help you out of your short term problem.
A cash flow loan is not necessarily the product itself, it’s more about the use of what you want the loan for.
How can a cash flow loan help me?
In short… A cash flow loan can provide a short term solution to a short term problem. By utilising a cash flow loan, you can avoid other expensive avenues of credit such as a highly expensive credit card or a prepaid mastercard with extortionate interest rates.
A cash flow loan is a way to achieve what you want to achieve without putting that stress on the business.
In this episode, John talks about naturally wanting to avoid taking out a loan if you don’t need it. But at the same time, you want to be as best prepared as you can in the event that a problem occurs.
John says: “You want to anticipate a problem before it occurs. You don’t want to leave it until you’re bouncing all the payments, where it will be visible on your bank statements.”
Ben adds: “If you someone hasn’t paid you on Monday and payday is on Friday, you run the risk of your staff not getting paid.
“You don’t want to leave it until Wednesday to decide what you’re going to do in that situation – it should’ve been sorted on Monday.”
John and Ben also go on to explain how being hopeful and optimistic about someone paying you when you need it the most, isn’t going to provide you with a solution. You will just be kidding yourself.
Will a cash flow loan be cheaper than alternative options?
John explains that, “nine times out of ten there will be a higher interest rate as it’s a form of short term borrowing, whether you’re borrowing for cash flow, equipment or a provision loan for a property – short term borrowing is expensive, more expensive than long term borrowing.”
The reason being if it’s short term – it’s usually quicker to obtain. If it’s quick to get, there is a reason why you need it quickly. As a result, the lender is going to want some sort of return. But that’s not to say they aren’t good products, as they are.
With a loan, there is an end in sight. You have the loan over a period of time, you will know exactly when your payments will be due and for how much. In comparison to a credit card where you may only have to make a minimum payment of £10 a month, then you’ll always owe the amount you originally borrowed.
John and Ben would highly recommend a cash flow loan over any other short term form of borrowing, as they explain how you will just be putting yourself in further trouble with credit cards or a prepaid mastercard.
What security do lenders want?
When it comes to unsecured loans, there is zero security in terms of there’s not a debenture on your company or a charge on your property/over assets, or you won’t have to refinance assets – there is however, a personal guarantee.
Unsecured loans are unsecured but, you will have to personally guarantee it as a director or a business owner, which won’t go on your credit file. Which means, if you’re a homeowner, it won’t prevent you from selling your home, moving house or buying property.
An example scenario where a cash flow loan has helped a client
John and Ben are currently working with a client who needs a cash flow loan of £20k as he’s just taken on a new contract and the new contract will take a few months to take effect when he starts invoicing out. So he needs the money to allow him to continue trading for the next two months.
It’s not a business rescue scenario, it is a scenario whereby he will be invoicing out a few hundred thousand pounds once this contract comes in, when the invoicing kicks in within the next couple of months. But he requires the £20k to service his usual bills like his rent and to pay his staff.
Cash flow loans are not necessarily required in an emergency, in this scenario it is a case of someone needing it to service the contract.
If you have any questions regarding cash flow loans, have a look at the Century Business Finance website. Alternatively, you can email or call John or Ben and put your question straight to them.