Is Cash Flow Financing a Viable Equipment Procurement Strategy?
Cash flow loans, which can also be called ‘cash flow financing’, are a type of loan with a fixed-price daily repayment plan. These types of loans are backed by expected cash flow instead of assets owned by the company. This makes a cash flow loan different from a bank loan because bank loans actually require collateral (or assets). But with a cash flow loan, the asset that you are borrowing against is actually the expected amount of revenue that your business will generate in the future. Cash flow financing is generally easier to obtain than bank loans are, and can be a very helpful for getting needed funding for your business.
Whether your a restaurant buying a new stove, a retail store upgrading its security system or a auto mechanic shop buying a new lift… there is much to learn about how cash flow products can vary greatly. Different cash flow loan providers may have slightly different terms and conditions, though you will generally find them to be relatively similar for the most part. Loan sizes may range from $5,000 to $250,000, and often come with 6 or 12 month terms. Interest rates for these terms may vary. You can expect to see rates of around 15% for 6 month loans, and 30% for 12 month loans. Depending upon the lender you select, certain fees may apply. Payment for these types of loans is a fixed amount and is made daily (instead of monthly, as is common with most bank loans). The payments are generally debited from the company’s bank account.
Cash flow loans are often obtainable in a very short amount of time. In fact, many of the better cash flow financing companies can offer instant qualification and can have your funds in your bank account in less than two days. This makes them a much faster option than bank loans, which can take weeks (or even months) to finalize and fund.
Who can benefit from a cash flow loan?
Cash flow loans are best for businesses with busy storefronts or bustling online marketplaces that sell a lot of small-ticket items to customers on a daily basis. The funds obtained can be used for just about anything. They can be used to make payroll, to buy equipment, to fund a marketing campaign, to purchase supplies, or even to restock inventory.
Of course, it is important to take stock of your current situation before making a loan choice for your company. Whether you choose a cash flow loan, a bank loan, company (third party) financing, credit cards, or any other funding method, it is imperative that you know and understand your future goals and expected revenue to avoid making a choice that could jeopardize future success.
Pros and Cons of cash flow loans.
- Qualification is often instantaneous
- Funding is generally completed in less than 2 days
- Does not require ‘good’ credit
- Does not require physical assets or ‘collateral’
- Payments are paid in small daily increments instead of larger monthly sums
- Accessible to businesses that might not have any other loan options
- More affordable than merchant cash advance options
- Generally require you to have been in business for a certain amount of time (they are, after all, based on cash-flow)
- Most cash flow loan companies require that you maintain an average monthly bank-account balance of at least $3,000
- Your business must be busy enough to make sales on a daily basis
- Cash flow loans generally have higher interest rates than bank loans
In the end, choosing whether or not to get a cash flow loan depends entirely upon your situation. Maybe you have applied for a small business loan but were denied. Maybe you have looked into merchant cash advances but were put off by the higher interest rates and excessive costs. Maybe your business enjoys regular cash flow but does not have enough collateral on hand to get any other type of financing.
There could be many reasons to choose to use cash flow financing, though the importance of doing your homework and knowing your options cannot be overstated. The truth is that there are many, many different funding options out there. All of them offer different advantages, and some of them will be better for your situation than others.
Is a cash flow loan the very best choice for your business? Only you can know that for sure. If you have challenges with your credit, need capital quickly, or do a fairly regular amount of business, then there is a good chance that cash flow financing is an option that would at least be a good idea consider.