There is no lack of options when it comes to getting a loan to fund your business operations.
Whether you’re just starting out your new business from scratch or looking for extra cash for upkeep, obtaining the necessary capital for your organisation can come from a multitude of different avenues. Traditional bank loans, business credit cards and other lines of credit are just a few methods that organisations use to fund their ventures.
But what do you do when you’ve exhausted those options and still require more capital?
One option worth looking into is applying for a cash flow loan. In this article, we’ll explain what exactly a cash flow loan is and how you can apply for one.
How does cash flow lending work?
Before diving into the world of cash flow lending, it’s important to first define the two types of loans: secured and unsecured.
What is the difference between a secured and an unsecured loan?
Put simply, secured and unsecured loans differ by what they are backed by. Secured loans, also known as asset based loans, require proof of collateral in order to be approved. As long as a borrower owns assets that can be relinquished in the case of a default, the lender will be more willing to lend out the amount requested.
Collateral can be anything of high value, such as real estate or a vehicle. The more collateral you own, the less risk you pose to the lending institution. Traditional lending institutions, like banks, usually only offer these types of loans to their customers. For borrowers in the early stages of their career or with no collateral, secured loans can be difficult to be approved for.
Unsecured loans, however, don’t require collateral for approval. Instead of basing a borrower’s risk based on their physical assets, institutions that offer unsecured loans look at a borrower’s credit. Several types of loans fall into this category, including cash flow loans.
What is a cash flow loan?
Because a cash flow loan is categorised as an unsecured loan, a borrower’s assets are not a part of the equation.
Alternatively, lending institutions will take a look at your organisation’s cash flow statement as the main factor for getting approved. At the end of every month, a company’s statement shows how much cash inflow and outflow that occurred during a set period of time. These statements are great indicators of how a business is doing, providing a forecast for a business’s financial state.
However, sometimes the cash flow statement may show that the amount of money owed by clients is expected to come in late or is delayed. This means that a company might have trouble paying off monthly expenses, especially if they really need the capital from those late payments.
Borrowers may choose to apply for a cash flow loan for a cash flow boost in these cases. Because their incoming money is reflected in their cash flow statement, borrowers are able to pay back their loans at a later date with ease.
If this type of situation sounds familiar to you, it may be worth considering applying for a cash flow loan.
What you need to apply for a cash flow loan
1. Cash flow statement
The most important part of applying for a cash flow loan is a cash flow statement.
A cash flow statement not only serves as a basis for the loan, but it also gives a quick glimpse into your company’s financial future. Gather your bank statements and calculate your company’s operation expenses in preparation for putting this statement together. Ensure that your cash flow statement is complete before submitting your cash flow loan application.
2. Good credit rating
Simply having a stellar cash flow statement may not be enough to get the capital that you need.
Even though cash flow lending is not an asset-based loan, the lender may still require a good credit rating in order to approve your cash flow loan. Cash flow lenders take a risk whenever they lend out their money, and a good credit rating is a great indication that a borrower will likely pay back their loan.
3. Personal guarantee
Because cash flow loans don’t require any collateral for approval, some lending institutions may require you to sign a personal guarantee that the money loaned out will be paid back in full.
A personal guarantee is a legal document that states that a loan will be paid back no matter the circumstances — even if that means an individual will be paying it back out of pocket. The borrower will assume the personal responsibility of the loan in the case that a business is unable to pay it back.
Personal guarantees are used as an additional layer of protection for lenders to ensure that their money is in good hands. Depending on the lending institution, a personal guarantee may or may not be necessary in order to be approved for a loan. Sometimes they’re used in conjunction with credit history, or solely on their own.
Business owners with poor credit are more susceptible to having a personal guarantee as part of their loan terms.
Benefits of financing cash flow
There are a few benefits of financing cash flow for your business.
1. Typically easier to qualify for
Applying for a secured business loan through a traditional lending institution can be difficult if you’re a new business owner, have less assets or have a spotty credit history. Conversely, cash flow lenders usually only take into account their credit flow statement and their credit history before granting the loan.
2. Quick temporary solution
For a business that only needs a temporary cash boost, going through the entire secured business loan application may take too long and be more trouble than it’s worth. Choosing a cash flow loan, especially if your business has a very strong cash flow statement, could be a faster and easier option.
These loan applications also take a longer time because they have to run a large number of background checks and verify your collateral as well.
3. More online options
Because of the number of online lenders that can help you achieve your business goals, your business will have a better chance of finding a lender that works best for you. Having multiple options will ensure that you’ll be able to find the best lending rates and loan repayment plan.