This post covers everything you need to know about a cash flow loan.
It includes how to apply, qualify, and select the best loan for your business.
So, without further ado, let’s begin.
What is a Cash Flow Loan
A cash flow loan is an unsecured loan that you can obtain based on your historical and future cash flow forecasts.
This type of loan differs from a traditional bank loan, where approval is based on your credit score. on the other hand, CFL relies on financial statements, particularly the cash flow statement.
How cash flow loan Works
Cash flow-based lending is approved based on your cash flow rather than your assets and credit score.
Most lenders are available online. When you contact them, they will request documents such as financial statements and bank statements. Using this data, they analyze historical patterns and current cash flow.
If your business meets their criteria, they will approve the loan. This type of loan is suitable for businesses with poor credit history, limited assets, and a strong cash flow record.
Example of cash flow lending
Let’s assume a bakery owner needs $20,000 to purchase ingredients and packaging boxes due to an sudden increase in sales. However, being a small business owner, he lacks sufficient cash and substantial assets to get a traditional bank loan.
He decides to seek an online lender, provides the necessary documents including a cash flow statement, and after verification, he receives $20,000 in his bank account.
The bakery owner will use this money to cover all expenses that arise due to a sudden increase in sales. Afterward, they will repay the lender with the applicable interest.
How to Qualify and Obtain a Loan
Cash flow loans are easier and faster to obtain compared to traditional bank loans. Many lenders offer online services.
You can find various lenders online, such as OnDeck and OAF. After reviewing all the lenders, compare their interest rates and payment terms. Choose the one that suits your business needs.
If you require short-term funds to address cash flow gaps, go with short-term loan, which may also offer a lower interest rate.
Once you’ve selected a lender, time to contact them. dealing with an online lender, they usually provide a contact form for you to fill out. After submit the necessary documents and its verification, the loan will be approved.
Advantages and Disadvantages
Cash flow loans have several pros and cons, so let’s discuss them one by one.
Pros:
Fast: Obtaining a traditional bank loan can take weeks or even months. In contrast, cash flow loans are much faster, typically taking 24 to 72 business hours, with most loans approved within 24 hours.
Ease of Access: Traditional loans involve extensive documentation and approval processes, whereas cash flow lendings require minimal documents for qualification, along with a simple application process.
However, despite the advantages, its come with significant disadvantages that should be noted.
Cons:
High Interest: Bank loans usually have interest rates of 7% to 8%, while cash flow loans, being unsecured and offered by individual agencies, often carry higher interest rates.
These rates can vary based on the lending organization and may range from 20% to 99%.
Automatic Payments: Due to the unsecured nature of cash flow loans, lenders may directly withdraw funds from your business account, regardless of whether you’re generating revenue or making sales.
It’s obvious that not all businesses are the same. This presents a challenge for small businesses, particularly those experiencing seasonal fluctuations.
Imagine being unable to generate sufficient funds on certain days or weeks, yet the lender deducts its payment automatically, which you had intended to use for other cost expenses.
Additional Fees: cash flow loan included different type of fees. Lenders often impose extra fees, including origination fees. Late payments or insufficient funds in your account can result in high penalties.
Personal Guarantee: traditional loan are secured by business assets but As small business owners often lack substantial assets, they often sign a personal guarantee document when opting for cash flow lendings.
This means that if your business cannot repay the loan, you’re personally responsible.
Choosing the Best Cash Flow Loan
Here are some recommended lenders and their loan options. However, keep in mind that they share common traits:
- Loan approval within 24 hours
- Acceptance of low credit scores
- Minimal documentation and a fast process
- Personal guarantee required
- Possible to can’t help to build credit score
- High interest rates
Now, let me provide you with information about each option along with key facts.
AMERICAN EXPRESS
Best for businesses with low monthly revenue.
Loan amounts available from $2,000 to $250,000.
Minimum credit score required: 660
Monthly repayments.
No prepayment or draw fees.
Business must be at least 1 year old.
Monthly revenue should be at least $3,000.
ONDECK
Best for short-term loans.
Can be used to build credit score.
Maximum loan amount: $250,000.
Minimum credit score required: 625
Not available in North and South Dakota.
Daily or weekly repayment system.
Business must be at least 1 year old.
Annual revenue should be at least $100,000.
BLUEVINE
Best for credit flexibility.
Loan amount range: $6,000 to $250,000.
Business must be at least 24 months old.
Not available in North and South Dakota.
Minimum credit score required: 625.
Estimated APR: 20-50%
You can adjust term length based on financial needs.
Possibly requires weekly payments.
FUNDBOX
Maximum loan amount: $150,000.
Estimated APR: 10-80%
Business must be at least 6 months old.
Minimum credit score required: 600
No prepayment penalties.
Short-term loans may require weekly payments.
BIZ2CREDIT
Loan amount range: $25,000 to $6 million.
Minimum APR: 8%
Minimum credit score required: 600
Minimum annual revenue: $100,000.
Commercial real estate loan approval may take 30 days.
Assets vs. Cash Flow Lending
Both asset-based and cash flow-based loans serve a vital role in financing businesses, but they differ in key aspects.
Asset-based lending, often provided by banks, requires collateral and involves a more complex review process, leading to longer approval times.
However, the interest rates are usually lower due to the inclusion of assets. On the other hand, cash flow lending assesses historical and future cash flow data. It’s a faster process with higher interest rates. Asset-based lending tracked by liquidity, while cash flow lending focuses on profitability.
Conclusion
In summary, we’ve thoroughly covered the all aspects of cash flow loans in this post.
If you have any questions
Ask me in the comments section.