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Published on Februar 25th, 2022 | by Sarah


How Does a Cash Flow Loan Work?

How Does a Cash Flow Loan Work?

Cash Flow Financing

Cash flow is the total money coming into and out of a business (or the flow of money in the form of revenue and liabilities that happen during the course of a month). A company Cash flow is distinctively different than net revenue, as net revenue relates to total revenues minus liabilities. But there are other ways a company ple would be loan proceeds). Cash-flow may vary for some companies based on seasonal factors, or other factors in the business cycle do to a variety of reasons. In this article we will look at the financing options available to both help companies with cash flow, but also use their company’s past and expected cash flow to obtain financing.

What is a Cash Flow Loan?

A cash-flow loan is a way for a small or mid-sized company to use their expected future revenue and past cash-flow as a way to get a business loan. A cash flow lender will examine a company’s bank statements and/or credit card processing transactions for the total cash-flow coming into the company. If a company has decent cash flow (but maybe not profitability) a lender may lend up to 200% of the company’s total deposits into their bank accounts and credit card processing statements. Since the cash flow lender is mostly focused on total cash flow, they are less concerned about credit of the business and business owner, and may not care about collateral at all. In fact, almost all cash-flow loans are unsecured (in the sense they don’t require commercial real estate or other specific types of collateral) but there are hybrid lenders that can offer cash-flow loans that are enhanced with the use of commercial and personal property.

Cash-flow loans work differently depending upon the type of cash flow lender you apply with. All lenders will begin by requiring a credit application so they can run credit. As mentioned earlier, having good credit isn’t a requirement for most cash flow lenders, as they focus more on revenue that credit history. If the business shows sufficient credit and doesn’t have any disqualifying incidents (defaults, current bankruptcy, etc) the lender will then move on to examining the company’s cash flow. By looking at a company’s main operating bank account statements and/or the company’s credit card processing statements, the lender will get an idea as to how well the company is cash-flowing each month. The lender will analyze the company’s cash flow by looking at total deposit amount, number of deposits into the bank account, daily average balance, minimum monthly balance, number of bounced checks and insufficient funds, number credit card processing transactions, total credit card deposits, etc. After analyzing the data over past 3-6 months, the lender will then calculate how much they feel the small business will be able to payback comfortably on a daily basis. From there, the lender will then multiply that amount by a term ranging from 3 months up to 60 months, and supply that amount to the merchant or business in the form of a loan or advance. Repayment for a cash flow loan is made either on a daily, weekly or monthly basis in forms including regular monthly payments, or by daily or weekly remittance via bank account ACH or through remitting a percentage of each day’s credit card transactions until the loan is fully-repaid.

Cash Flow Loan Pros

There are a number of advantages of cash flow loans, especially for company’s that may lack profitability or have credit that won’t allow them to get approved at a bank. For company’s locked-out of traditional financing, a cash-flow loan offers fast financing (1-5 days depending on type) as opposed to months with conventional lenders. A company only needs to show minimal documentation for a cash flow loan (often only application and bank statements) as opposed to traditional financing which requires extensive documentation. While a lien will be placed on the business when financing occurs, no specific collateral is needed to get approved for funding. A company only needs to be in business for 6 months to get approved for some cash flow financing types, where a bank would require a company be in business for at least 2 years.

Cash Flow Loan Cons

A general downside of most cash-flow loans are the rates and terms offered. As compared to conventional bank loans, a cash flow financing can be expensive – sometimes extremely expensive. Since these lenders are focusing on past bank account cash flow, there is a risk that future performance may not live up to the past. Therefore the lenders are taking increased risk – and such risk will be priced into the loan or advance in the form of higher interest rates, higher fees, and shorter terms than conventional lending.

About the Author

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