What You Need to Know about Small Business Cash Flow Loans

What You Need to Know about Small Business Cash Flow Loans

There are times when small business owners need cash fast in order to solve their financial problems. They can’t go to a traditional lender because they can’t wait for the approval, which usually takes weeks or even months to process. For fast cash, small business owners usually apply for cash flow loans. Doing so allows them to get the money they need in less than a week.

Unlike secured loans that require collateral, lending institutions base the approval of a cash flow debt on the company’s cash flow. They look at the business’ financial records and its projections to determine its qualifications and reliability.

This type of debt doesn’t require the owner to use the assets of the business, and the approval process takes only two to three days. This financial tool is the perfect solution for small businesses that need to solve a short-term financial problem.

How to Qualify for Cash Flow Loans

Credit providers look at the company’s steady growth to determine whether it qualifies for financing. They look at the net income to find out if it can cover the financial obligations including the additional debt because it requires a weekly or monthly payment, which the business owner must incorporate into the company’s budget.

When to Get Cash Flow Loans?

There are situations in which a cash flow debt loan can be beneficial to your business. Gaining access to fast cash when you need it the most is one of the reasons why you should apply for one.

1. Emergencies

Although you think you are prepared for anything that can happen in the year, some challenges can easily pop up when you least expect them. You might need the money to cover unexpected expenses connected to emergencies.

It is good practice for every business to have an emergency fund. However, there are times when small businesses don’t have the chance to save up for a rainy day. Getting a $2500 unsecured loan can assist them through rough times and keep operations moving smoothly at the same time.

2. Expand the Business

You could also use the loan to fund a business opportunity. Expanding your business can affect its cash flow positively. You might want to consider cash flow loans to make the most out of that opportunity. As an example of a situation like this, you get a new contract but don’t have the capital to fill the purchase order; a loan can help increase your working capital, so you’ll be able to fill the order.

3. Employ Additional Staff

Some businesses look into cash flow financing when they need to employ new workers. Filling new roles in the company requires more capital.

Hiring staff is a great time to consider business cash flow loans
Image Credit: Commsocpe/Flickr

You can achieve short-term goals through this type of financial tool by getting the working capital you need to expand the business without interrupting your normal operations. Just make sure that you get high returns on the investment so that you can easily repay the loan.

Types of Cash Flow Loans

Small business owners can apply for several types of cash flow loans to help them increase cash availability. Some of them are:

  • Instalment loan – This type of loan is also known as a term loan. You get a large sum of money, and you need to pay for it in monthly instalments. You pay interest throughout the term of the loan, but you can save money by repaying it early. You can use this type of loan for working capital, equipment, business acquisition, expansion, debt refinancing, and inventory purchases.
  • Short-term loan – This one is like an instalment debt but has a short term of three to eighteen months. The instalments can be on a daily or weekly basis. It is a low-risk debt with little to no requirements.
  • Line of credit – You don’t get a lump sum with this type of debt. You gain access to a credit line with a specific limit. You can draw from the line of credit any time. Uses for this type of loan might be payroll, seasonal expenses, and unexpected expenses, just to name a few.
  • Invoicing financing – This financial solution is ideal when you have unpaid invoices. You sell them off for cash. Qualifications and contract lengths differ from one lender to another. Taking on this kind of debt can greatly improve your cash flow, even when you have slow-paying customers.

Comparing Cash Flow Financing

It is easy to compare one type of financial solution to another. The best benchmark is their annual percentage rate, which is the yearly cost of the loan, including fees, service charges, and interest.

The APR lets you check whether the financing solution is within your acceptable range. However, you should also look at the terms of the loan to make sure that they are favorable for your organization’s needs.

Qualifications for Cash Flow Financing

Most lending companies require a business credit score to assess the company. Establishing a good rating is advisable so that your company qualifies for good interest rates and terms. It is very important that you separate your personal and business finances. That way, you can file tax returns for the business, and at the same time, protect your personal assets from creditors.

The longer you are in business, the higher your chance is to get approval for financing. Some institutions require the business to be in business for at least two years. You might still qualify for a loan even if you are operational for a year but expect the debt to have a higher interest rate.

Before finalising any deal, make sure you read all the terms and conditions, including the fine print. You should make sure that the financial tool is beneficial for your organisation and not a negative or harmful to your business.

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