Cash Flow Loans
For this type of business financing, lenders provide you funds and use your future expected cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future by giving the lender the rights to a predetermined amount of these receivables. These are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role. As the name indicates, the lender is more concerned with inspecting your cash flow (usually bank statements) to approve your application. Turnaround time is fast, but be aware: interest rates are higher than other forms of financing.
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What You Need to Know About Cash Flow Loans
|Fast access to money (usually within a week)||High interest rates (25% – 90%)|
|Poor credit scores may be OK||Lender has direct access to bank account|
|Less effort and documentation needed||May have pre-payment penalty|
|No physical collateral required||Typically, must have 2 years in business|
|Can improve your credit scores|
Best Uses for Cash Flow Loans:
- Working capital
- High ROI short-term opportunities
- Purchasing highly-discounted inventory
If you’re in need of short-term financing and your credit isn’t great, this route could make sense. It’s tough to fully endorse cash flow loans because of their high interest rates—but at least they’re typically less expensive than merchant cash advances. Before jumping into this option, you should have a clear idea of how you plan on using the funds and confidence that your future sales will cover the payments. Your loan payments are directly withdrawn from your bank account, which means you must monitor balances to make sure you don’t overdraft.
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