What Are Cash Flow Loans?

These kinds of loans offer a range of benefits over more traditional loans.

Updated: May 20, 2024
Matt Crabtree

Written By

Matt Crabtree

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Regardless of whether you're a small start-up business or you're running a much more established corporation, literally every size of company needs to maintain a healthy cash flow if they want to stay on top of their finances.

From covering your basic ongoing operations and expanding the size of your business to even being able to weather any economic downturns further down the line.

Generally speaking, though, most, if not all, businesses encounter some kind of cash flow problems at some point, so being able to grow and generally just stay profitable as a business can get pretty difficult — especially if you're only a small business that's just starting out and needs every bit of income they can get their hands on.

Fortunately, a business cash flow loan can be a massive help in these kinds of situations, as they basically allow your company to bridge some of the financial gaps you might have in order to actually keep your business afloat.

Having said that, there's quite a lot of nuance and things you need to get your head around before you apply for one of these loans, so throughout this article, we'll be taking a closer look at what cash flow loans are and how they actually work — as well as what makes them so significant for businesses around the world.

Understanding Cash Flow

Before we get started, let's provide a bit of background information and break down what cash flow actually is, as it's a pretty fundamental concept that any business owner needs to understand.

In essence, cash flow basically represents all of the money that's moving in and out of a company across a specific period, most commonly around a month or even a year.

Positive cash flow, as the name suggests, is whenever your business is making more cash than it's actually spending, while the exact opposite, negative cash flow, happens whenever your expenses are more than the amount of money you're bringing in each month.

Naturally, you'd never want to have negative cash flow. Even if you had to make some relatively unexpected big investments that put a dent in your pocket.

Having a steady and healthy cash flow is absolutely paramount for covering all kinds of operating costs, as well paying off debts and generally just being able to reinvest some of the money you make back into your business.

For a bit more clarity, let's cover the three main categories that cash flow is usually divided into:

Operating Cash Flow

Firstly, operating cash flow is essentially all of the money that's either made or lost as part of any of your day-to-day business operations — whether that's things like how many sales you're making, the things you're spending money on or just your working capital management.

Investing Cash Flow

Next, and probably one of the most common ways that a company can have negative cash flow, is ‘investing cash flow', which means all of the money that's flowing around relating to long-term business investments that you're making — think of things like buying or selling assets, property, or equipment.

Now, this is maybe slightly more applicable to bigger and more established businesses, as they're the ones that are usually investing significant sums of money into things — not to mention that they might already have quite a lot of cash reserves that allow them to be a bit more risky with their investment strategy.

On the other hand, small companies are generally just trying to gain a solid footing in the business world and find some form of financial stability, so making heavy long-term investments probably comes a little bit later in their development.

Financing Cash Flow

Lastly, there's financing cash flow, basically covering all of the cash that's either generated or spent whenever you explore any financing opportunities — whether you're obtaining loans, repaying debt, or even just issuing shares.

Again, the last option of issuing shares is definitely something that can cause negative financing cash flow, but if you're only a small business or even just a sole proprietor, this might not be something you need to worry about (at least in the short term).

The Importance of Healthy Cash Flow

Though it might seem generally pretty intuitive to always strive for a healthy cash flow, it's worth recapping some of the various reasons why it's so important that your business finds some stability here:

Survival

Kicking things off, of course, being a highly profitable business is the ultimate goal of any kind of company, but you have to have a positive cash flow even just to meet the bare minimum amount of revenue needed to let your business survive and meet all your various financial obligations.

For instance, you'd only be able to cover things like paying your suppliers, employees, or any other kinds of essential expenses for so long if you're going through a fairly sustained period of negative cash flow, so it's crucial to be positive instead, or you stand a good chance of your business becoming insolvent.

Growth

Though this is still important for all of the more established businesses out there, small businesses, in particular, are never going to be able to invest all of the necessary capital that's needed to actually expand and develop their business if they don't have a positive cash flow.

Whether that's not being able to hire any new staff (because you're barely able to afford to pay your current employees), launching or researching any potential new products, or even just opening additional locations.

Resilience

Of course, having a positive cash flow is nice when things are going well, and you're essentially able to take all of your profit home or even just reinvest it back into your business, but if you ever face any random unforeseen challenges or expenses, it becomes more of a necessity instead.

Rather than helping your business grow, you're able to use the money generated from your positive cash flow as a kind of cushion instead to help you get back on your feet and weather the storm.

To further point out how important this can be, imagine the flip side where you're currently experiencing negative cash flow and all of a sudden face another massive hit — an unexpected penalty or client dropping out, for instance — and think about how devastating that could be on your business's longevity as a result.

Opportunity

Lastly, having a positive cash flow is generally going to give your business a chance to take advantage of any business opportunities as they arise — whether that's something like buying out a competitor (for any of the larger business owners out there) or even just investing in things like research and development.

Still, having said all of this, it's obviously easier said than done to be constantly maintaining a consistent positive cash flow — again, especially if you're only a small business that doesn't have a significant amount of resources or experience in the game.

The reality is that the majority of businesses are always going to face some length of time where they're pretty strained financially, and this is exactly where cash flow loans come into play.

What Are Cash Flow Loans?

Generally speaking, most cash flow loans (they're also referred to as cash flow financing or, more specifically, business cash flow loans) tend to work on an unsecured basis.

This essentially means that you're not going to have to put up some form of collateral to actually receive the cash flow finance that you need.

Like other kinds of unsecured business loans, you're generally going to need relatively decent credit scores to actually receive one, given that the bank/lender doesn't have any kind of reassurance that you're going to pay the loan back promptly.

Put simply, though, these are basically just a kind of loan that primarily focuses on helping your business out with any short-term cash flow problems you might have, which naturally makes them a pretty invaluable tool whenever traditional lenders aren't willing to give you a loan.

We'll come onto this soon, but it's worth mentioning that cash flow loans are also slightly distinct from your average business loan — like term loans or general lines of credit.

Although you still need decent credit to obtain one, they tend to focus a lot more on how likely your company is to have better cash flow in the near future rather than having to put up substantial collateral or have spotless credit history.

How Cash Flow Loans Work

So, as mentioned, cash flow loans focus a lot more on your projected cash flow whenever the lenders are deciding whether to approve you or not.

Taking a look at things like your expected cash inflows and outflows (usually for a specific period, like a month or so) so they can properly determine how likely your business is to meet all your financial obligations and ultimately repay the loan.

Let's wrap things up by walking through how this process generally works:

Application

Naturally, it all begins with actually applying for the loan, and you usually do this by providing the lender with some necessary financial documentation — things like cash flow projections, income statements, and balance sheets, for example.

Assessment

Afterwards, the cash flow lenders are going to take a long look at some of your business's financials so they can properly check whether they think you'll be able to repay the loan or not.

Again, although having a perfect credit history isn't exactly mandatory, it can definitely still improve your chances of getting approved.

Terms and Conditions

In general, cash flow loans come with a bunch of different terms and conditions — whether that's the interest rates, repayment schedules, or just personal guarantee requirements — so it's vital that you understand what your overall obligations are before you accept the loan.

Funds Disbursement

So, once you've read up on the terms and accepted them, you'll finally be given the loan! From here, you can use it for a bunch of different purposes, from covering some of your immediate expenses to investing in your business's growth.

FAQs

Can Established Businesses Benefit From Cash Flow Loans, or Are They Primarily for Start-Ups?

How Does a Cash Flow Loan Differ From More Traditional Loans?

Can I Apply for Multiple Cash Flow Loans If My Business Faces Recurring Cash Flow Problems?

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