Over 2.2 million customers use QuickBooks.
Sign up for a free trial!

Is Cash Flow Lending Right for Your Business?

By Samuel Williamson

2 min read

Cash flow lending is one of the more traditional routes to securing a loan and is based on company cash flow, usually with a fixed-price daily repayment plan.

Banks tend to favour these types of loans because they are based on business-revenue generation.

But are they really the best option for your business?

How is it Different to a Bank Loan?

Cash flow lending may be a good option when a business needs a quick solution. In many instances, these types of loans can be secured quicker than a bank loan. Some lenders even provide instant approval and have funds in your account within a matter of days.

Unlike bank loans that are typically repaid monthly, cash flow loans are usually a fixed amount paid in small daily increments. However, interest rates, terms and conditions, loan sizes and loan terms can also vary greatly between financial providers.

While a typical bank loan requires collateral, or assets, cash flow loans are backed by the cash flow or revenue amount the company is expected to generate. This means cash flow loans may be a viable option for businesses that might not otherwise be able to access any other loan options. Generally they are more affordable than merchant cash advance options.

Things to Consider

There are some downsides to cash flow loans. Interest rates on cash flow loans can be extremely high and on some occasions up to 90%. Prepayment penalties mean borrowers may be locked into absorbing these costs, even though the business might be in a position to repay the loan early. Borrowers must also be extremely vigilant when monitoring their cash flow and bank balance to avoid overdrafts and potentially costly fees.

It is also important to remember that cash flow finance is not a long-term financing solution. Any temptation to use this sort of loan as a permanent financing strategy can open your business to risk if misused for the long term. However, using cash flow finance in the short term, when engaged effectively, could be a positive tool for business growth.

Are You Eligible for a Cash Flow Loan?

In order to obtain a cash flow loan, a company generally must ensure it is in good financial shape and demonstrate it has been in business for a certain amount of time. Most cash flow providers also require businesses to maintain a certain monthly bank account threshold. The company must also generate enough sales activity on a daily basis, which makes cash flow loans suitable for businesses like e-commerce merchants and shop owners.

There is no one-size-fits-all solution for cash flow finance. It is important to evaluate your current situation, your expected revenue and the scope of your business goals. You should also obtain financial advice in order to make an informed decision as to whether a cash flow loan is right for you.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

What are Australia's best small business loans?

Whether you’re just setting up shop or undertaking a company-changing expansion, there…

Read more

Understanding payment methods for your small business

One of the most important parts of running your own business –…

Read more

To register for GST, or not?

So you’re starting a new business.  One of the things you will…

Read more