As a small business owner looking for financing options, you may have heard of cash flow lending, but you might also still be uncertain if it’s the right choice for you or your business.

Broadly speaking, cash flow lending is a type of loan that is based on your historical and future cash flows. This makes cash flow loans a good option if you are a business that does not yet have many assets, or have a lower credit score, or are in need of financing quickly.

You may also find that these financing options can either be secured or unsecured loans depending on which financial institution you end up working with.

To help you make an informed decision on whether cash flow lending is a fit for you, we’ll go over:

• What cash flow lending is
• How it works
• Differences between cash flow lending and asset-based lending
• How to qualify for cash flow lending

Cash Flow Explained

Let’s first understand the basics behind cash flow, as it’s one of the most important aspects of a business’s financial health. Whenever customers pay for goods and services, cash flows into your company. Conversely, when you pay suppliers for inventory or pay bills, cash flows out.

In this way, having a positive cash flow is a good indicator to lenders because it represents more cash flowing into your business and therefore a better likelihood of you paying your loans back.

Having a negative cash flow isn’t necessarily a bad signal to lenders if, for example, you are investing in things that will grow your business like hiring more employees or running marketing campaigns.

However, the balance lies in not spending to the point where expenses become unmanageable and you become unable to show lenders that you are capable of sustainable growth.

What Is Cash Flow Lending?

Now that we have an understanding of what cash flow is, let’s get into cash-flow-based lending.

Small businesses looking for cash flow loans typically seek quick access to cash without always having to provide collateral or having a potentially low credit score stand in the way. Cash flow lenders may also offer flexible repayment plans tailored to fit the needs of certain companies or industries.

Unlike traditional bank loans that may place more emphasis on your credit history or may review your entire financial track record more extensively, cash flow lenders look mostly for your ability to generate revenue and manage expenses.

Cash-flow-based loans are typically faster to obtain than other forms of financing. You can receive funding in as few as 24 to 48 hours, as opposed to traditional bank loans that can take up to several weeks or longer.

Cash flow loans should be thought of as short-term loans, which means that:

1. Financing amounts tend to be smaller because they are intended to cover short-term working capital needs.
2. Approval time is faster because there are less intensive requirements needed for short-term loans.
3. Interest rates may be higher as a trade-off because of the more flexible requirements and faster time to acquire the funds.

Cash flow loans are best used to cover everyday expenses, also known as working capital, that are necessary for keeping your business running. For example, you can use cash flow loans for more inventory, payroll, bills, and rent.

However, these loans can also be useful to help with unforeseen situations that arise, like needing a way to fulfill financial obligations during seasonal slowdowns.

As such, these loans are a good fit for business owners who need immediate financial assistance in order to keep their businesses running.

 How Cash Flow Lending Works

Cash flow lending allows you to take out a loan based on the revenue you will receive in the future.

In order for lenders to determine whether or not you will be approved and how much you will be approved for, they must first take a look at your historical and projected cash flows. They may also take a look at your credit, but there is less of an emphasis on having perfect credit. 

In fact, you’ll find that cash flow lending is often a suitable alternative for business owners with less-than-perfect credit who need financing quickly.

The timeframe to get both an approval and actual funds from cash-flow-based business loans is significantly faster than if you were to apply for other forms of financing like a traditional bank loan or a long-term loan.

The funding process from application to approval to receiving funds can be as fast as the same day or 2-3 business days. This differs from long-term loans or other types of more involved financing that can take weeks or even months.

Because cash flow loans are considered short-term loans, the typical term you can expect is anywhere from 6 months to 2 years, and the typical funding amount ranges from $5,000 to $400,000.