This drop in interest rates for business loans has business owners wondering if now is the time to grow with the help of additional cash flow loans. If you’re debating this, you’re not alone.
New cash flow avenues can be huge when a business is in a growth area, but the idea of taking on debt and worrying about repayments is daunting. You can feel stuck—you really need to invest in additional space or tools to take your small business to the next level, but your bank account balance may make you second guess.
Depending on your stage of growth, leveraging short-term loans can be a great way to get you to that next stage of growth.
What is cash flow financing?
Cash flow financing (also known as cash flow lending) is a specific form of financing that bases your loan on your future cash flow, versus using any current physical assets as collateral. Think about the assets a construction business could put up as collateral, versus a marketing agency. One of those business models will have a lot more access to high-value items or machinery than the other, even if they are both in a similar financial space.
What is the difference between a cash flow loan and a traditional loan?
There are a lot of similarities with cash flow loans and a more traditional loan. However, there are also some key differences to be aware of when looking at this world of financing.
Approval times: In a pinch, look no further! You can typically expect a quicker approval time with a cash flow loan.
Focus: Cash flow loans are quite focused on your future. Don’t worry if your balance sheets or cash flow forecasting isn’t painting the best picture of the last year. If you can show that you have a plan to make money in the future, you have a higher likelihood of success with this lending/
Terms: Larger loans are typically meant to keep you afloat for a longer period of time. Cash flow loans are meant for short-term success (keeping you afloat for a seasonal slow time at winter, for example). Leverage these loans for short-term needs, and explore more traditional loans for long-term needs.
Interest rates: Given the risks for a lender associated with cash flow loans, you have to prepare for a higher interest rate (versus a traditional loan). Have a plan for paying down these loans in a timely manner, or you may struggle with the growing interest.
How does cash flow financing work and help your business finances?
Have you ever looked at your business cash flow and felt a pit in your stomach? You know you’re profitable, but you’re waiting for three huge clients to pay your overdue invoices and you just went on a hiring spree for headcount to support said three large clients.
These types of loans are a good solution for businesses that:
Don’t have an extensive credit history that traditional bank loans require
Lack collateral required for asset-based loans (after all, asset based lending is tricky without assets!)
Don’t have a large history of profitability and are looking for financing options that will help deal with current costs (like staying afloat during the slow season of a seasonal business, or floating payroll until you receive pay fro clients)
Because of this, you can typically expect higher interest rates on cash flow financing loans. After all, the lenders are taking on a bit more risk. It’s important to have a plan to pay back the loan efficiently and avoid hefty interest rates.
How do you find lenders for cash flow financing?
Finding a lender for any loan is where things can get overwhelming. The application process can look different for everybody, and the eligibility for the same loan can vary between lenders.
And there is also a bit of legwork required to find a lender. Here are some ways to look.
Check online: Everything is online nowadays, and loans are no different. Some online lenders can grant you loans right from your computer or phone. Search online and see what online lenders you can find.
Chat with your bank or banking solution: Your bank or banking solution may either offer cash flow funding or have a direction to point you in.
Look on government websites: There are no federal grants for starting a business, according to the United States government website, but the Small Business Administration (SBA) offers loans and funding approaches. They have specifically funding for women-owned businesses, minority-owned businesses, Native American owned-businesses, veteran-owned businesses, military spouse-owned businesses, rural businesses, and LGBTQ+-owned businesses.
Source information from other business owners: Chances are, your network has more information than you think around this. Chat with other small business owners about where they are getting cash flow loans or more traditional loans, where they’ve had a good experience, and where they feel like it was a rocky partnership. Take advantage of research and experience your community has already been through!
Questions to ask lenders—and questions that lenders will ask small business owners
Naturally, you can expect there to be questions involved when it comes to somebody giving you access to a large sum of money. Let’s break down questions on both sides—questions lenders will ask you, and what you should ask them.
Questions lenders will ask a small business owner
Here are some of the questions you can expect:
What type of financing are you looking for?
How much money do you need?
What is the money being used for?
What is your repayment plan?
Can you share your company’s cash flow? Any cash flow statements?
Can we see your cash flow projections for the future? Any forecasts are valuable.
Do you have any other financing activities we should know about?
Do you expect future revenue?
Can we review your financial statements?
All of these questions help lenders to understand your business operations and the chances for your success. After all, your success is what they need to get paid back.
Questions small business owners should ask lenders
Think of cash flow funding lenders (or lenders of any loans, really) as a business partner. You’ll be working with them for a decent amount of time, so you need to feel good about that. Here are some of the questions you should be asking lenders upfront.
What do you recommend, based on my needs?
What are the repayment terms of my loan?
With interest, what is the total loan amount?
Do you offer different types of cash flow loans?
What traditional loans do you offer?
Have you worked with other small businesses/entrepreneurs/startups in my position? How was that partnership?
Is there ongoing support of my loan or business needs change throughout the term?
Lenders should be able to answer most of these to give you confidence in your decision!
Keep in mind, you don’t have to ask all of these questions, and you also won’t be asked all of these. This list isn’t a guarantee, nor is it fully expansive. These are just samples of what to expect as you are chatting with different providers, and how to prepare yourself for the conversations.
What are other ways to unlock more cash at your business?
Cash flow lending isn’t the only way to get your hands on additional working capital for your business. Other options include:
Lines of credit: A line of credit is a great way to unlock cash . Pro tip: Make sure you have a business line of credit. Using a personal line of credit for business will messy your accounting and potentially impact your credit score.
Credit cards: Credit cards are a fantastic way to increase your day-to-day access to cash—if you’re using them strategically. Typically, credit cards give you access to money you don’t have in an account that moment, which is huge when you need to make bigger business purchases or surprise expenses come up. Another bonus is the benefits you can reap from a reward credit card, like cash back or points. Like a line of credit, ensure you are using a business credit card specifically to keep your finances clear.
Unsecured loans: Once you’ve established yourself with a lender and built a good rapport (plus have a run of positive cash flow to show for your business success) unsecured loans can be a great way to keep cash flowing. With an unsecured loan, the lender can’t take claim of any of your assets. Because of the personal guarantee with these loans, you can often see this between family or friends.
Stay ahead of your financing with cash flow funding
Loans can be daunting, but when used correctly, cash flow funding can be a way to boost your growth. With extra funding, you can invest in team growth, have the budget to create bigger projects, or even just keep rent payments up-to-date while you wait for those big checks to clear.
Want to stay on top of all of your payments? Relay can help. With next-level cash flow clarity, you’ll know exactly where every dollar is going, ensuring you have the cash on hand to avoid any late payments. Sign up today for cash flow clarity—and so many other perks.
Relay is a financial technology company and is not an FDIC-insured bank. Banking services provided by Thread Bank, Member FDIC. FDIC deposit insurance covers the failure of an insured bank. Certain conditions must be satisfied for pass-through deposit insurance coverage to apply.
