5 Prudent Solutions for Small Business Cash Flow Lending

Looking into cash flow lending options? If your small business is struggling with cash flow problems, take comfort in the fact that you’re not alone. According to a recent study, half of small business owners routinely struggle with cash shortages and for a variety of reasons.

When cash is tight, small business owners often look for outside sources of financing so they can make payroll, stay current with their bills, develop new products, launch marketing initiatives, and otherwise grow their companies. Instead of going through the arduous process of trying to obtain a loan through a traditional financial institution or the Small Business Administration—both of which are extremely picky when it comes to approvals—many of them examine their cash flow lending options to determine which one makes the most sense for their specific situation. Generally speaking, they generally choose one of four options.

5 Prudent Solutions for Small Business Cash Flow Lending

Merchant Cash Advance

If yours is a business that collects credit card payments, you can opt to use a merchant cash advance. In this form of lending, you sell a portion of your future credit card receipts in exchange for fast money. While approvals are easy, if you choose this route, you’ll have to forego a significant amount of your income as merchant cash advances often come with significant fees.

Traditional Line of Credit

The traditional line of credit is typically meant for experienced business owners with proven business models. Which makes sense since the credit maximums are sizable, the rates are lower, and the requirements demand higher credit scores and annual revenue reporting. If you’re a business owner taking out a line of credit, you’ll be spending that flexible cash on seasonal business expenses, payroll and other operational costs, insurance against emergencies and for sudden opportunities. In other words, as a capital cushion. It’s there for you when you need it.

Short Term Line of Credit

The difference between a short-term line of credit and a traditional line of credit is more or less the same as the difference between your typical short-term loan and conventional bank or longer-term online loan  Therefore, a short-term line of credit has a higher interest rate, lower credit maximum, faster turnaround time and looser application requirements. Unlike the traditional line of credit, the short-term line of credit is generally offered by alternative lenders rather than by banks. The point isn’t that one is better or worse, they appeal to different groups of business owners. Those with lower credit scores, smaller annual revenues, or newer businesses might only qualify for a short-term line of credit. And although the short-term line of credit tends to be more expensive, its value lies in giving younger small businesses the opportunity to maintain a flexible pool of capital. A small business line of credit provides flexibility that a regular business loan doesn’t. With a small business line of credit, you can borrow up to $100,000 and pay interest only on the money borrowed. You then draw and repay funds as you wish, as long as you don’t exceed your credit limit. Need to manage cash flow? Buy inventory? Pay for a surprise expense? Then a business line of credit makes sense.

Invoice Backed Line of Credit

The basic idea behind invoice financing (also called accounts receivable financing) is that, sometimes, customers take a long time to pay you back -- but you might not be able to wait. Instead of relying on short-term loans to cover operating costs, or digging into your savings, you could just get those invoices paid right away -- although you’ll have to shoulder the costs of that speed and efficiency. An invoice-backed line of credit follows the same logic. The value of your invoices determines your credit maximum, and you can draw capital as needed instead of relying on your customers to pay on time. And as your invoices increase, you’ll typically have access to more cash from the line of credit as well.

There are many situations where invoice financing can help. Invoice financing works best for small businesses that don’t get paid right away, but instead invoice their customers and wait to receive payment in 30, 60 or 90 days (or even later).

Sometimes, waiting for those customers to pay you can really put a crimp in your cash flow. After-all, if more money is flowing out than flowing in, you are setting yourself up for a cash crunch; which is why many small businesses wind up out of business. Theoretically, your business is doing well because you have lots of outstanding invoices, but in reality, you don’t have the cash on hand to handle immediate expenses such as payroll and inventory. This is where invoice financing comes in handy.

Invoice financing can be useful for very small businesses, and even freelancers from which an unpaid invoice can make the difference between paying that month’s mortgage or not. However, it’s also valuable for businesses with big clients that frequently are slow to pay, such as government agencies or corporations that may have a lot of red tape involved in the payment process.

Invoice financing works best as a short-term financing option that can provide the working capital you need to get over the hump until you get paid. Because you get your money quickly, invoice financing is an ideal solution when an unexpected cash crunch hits and you can’t wait for a traditional bank loan. It’s also a great solution when you don’t need a small business loan, just a little bit of extra cash.

ACH Small Business Loans

For starters, an ACH small business loan can also be referred to as a small business cash flow loan, small business revenue based loan or a small business merchant cash advance. The ACH designation really applies to how the lender is paid. ACH or Automated Clearing House, refers to the lenders ability to withdraw an agreed upon amount directly from your checking account at agreed upon intervals, typically daily or weekly. This is different from factoring your accounts receivable (A/R), because instead of billing your customers and collecting from them, they directly access your checking account in much the same way automated payments might go to you mortgage lender or a utility company from your personal checking account.

An ACH small business loan, much like factoring or an MCA loan, should be considered a small business short-term financing option. The cost of the capital is more expensive, in other words you’ll pay a higher interest rate, but you’ll be able to access that capital much quicker than a traditional term loan from the bank or other financial institution.