Cash flow lending: The ultimate guide

If you’re looking for a loan to fund your small business, you’re probably aware of the many types available. But here’s a quick refresher.

Loan types are typically split into two categories: secured and unsecured. When you think of a traditional loan, chances are you’re thinking of a secured loan. During the traditional loan application process, lenders usually investigate your current assets and calculate your total net worth based on what you have. Through these calculations, they are able to determine the maximum amount of money they can lend you — limiting it to a fraction of your net worth. Due to the role that your assets play in your business loan, secured loans are also known to be a type of asset based lending. 

Unsecured loans work a little bit differently. Unlike traditional loans, unsecured loans do not require assets as a prerequisite for taking out a loan. This can be great news for small business owners who may not have many assets or young entrepreneurs still building their credit history. Many alternative and online lenders offer unsecured loans for new companies starting out. 

One type of unsecured loan, cash flow lending, works a little bit differently from the rest. Let’s dive into why this particular loan stands out from the rest, and together we can decide if it’s the right loan for you.

The cash flow lending process

Before we dive into what cash flow lending is, it’s important to understand what a cash flow forecast is.

What is a cash flow forecast?

A cash flow forecast is a standard method for a company to calculate how much profit it expects to make over a given period of time. By adding up all of the company’s inflow (i.e. product sales, outside investments, additional financing) and subtracting all of the outflow (i.e. production costs, loan repayment, employee salaries), your firm can get a good idea of how much projected revenue it will earn in the future. Your net inflow from this calculation, as well as your company balance sheet, forms the root of how cash flow lending works.

What is cash flow lending?

Cash flow lending is a type of unsecured loan that uses that projected value of your company as the basis for the loan. Think of it as an IOU, but for a business loan. The borrower doesn’t have the money that can be used as collateral right now but it will in the future. Since companies typically know how much they will make through cash flow analyses, a lender is usually content with knowing that the borrower won’t default on their loan — especially because they will have the money to pay it back. A solid cash flow forecast is usually enough to convince the lender to finance your business’s latest ventures. 

In addition to cash flow lending, many lenders can also make the borrower sign a personal guarantee confirming that the borrower will pay any outstanding debts back to them. Adding a personal guarantee makes it the borrower’s personal responsibility to fully repay the loan— no matter what may happen to the business in the future.

Why you should consider cash flow lending

Cash flow lending is often a great option for companies that have consistent seasonal peaks and valleys in revenue. If your business does very well during certain times of the year but may need extra cash temporarily during others, cash flow lending could help you effectively access capital.

A great contender for a cash flow loan would be a restaurant in a tourist-heavy area, for example. During the off-season, the restaurant may be barely scraping by to pay for its staff, its high price of rent, or maintenance costs. However, the owner knows that once summer rolls along, high foot traffic in the area will lead to more customers and a higher positive cash flow. It would then be wise for this restaurant owner to apply for a cash flow loan during the off-season with the promise that it will pay the loan back later.

Cash flow lending could also be an effective lending option for new business owners who may not have too many assets on-hand. Lacking such assets automatically eliminates them for most secured business loans. However, cash flow lending could be one way they can finance their business. With a highly promising cash flow plan, lenders will be more likely to offer a loan. 

What financial institutions look for with cash flow lending

When evaluating a cash flow loan application, lenders typically look for a few things: the company’s cash flow plan, credit rating and expected incomes. Even though cash flow lending is a type of unsecured loan, these lenders still need to make sure that they can trust the borrower to repay on time. Some lenders can still be very stringent on their terms and may weigh each component of the application differently. It’s best to ask different lenders — in person and online — for the loan that best suits you.

How UnLock can help

Interested in financing your business through the help of cash flow based lending? UnLock, one of Australia’s leading online credit lenders, can make it happen.

Unlike other lending institutions, which can require real estate assets as a prerequisite for loan approval, UnLock can offer your business a loan through alternative lending methods. 

Read more about UnLock by visiting our site, or contact us today