Is Cash Flow Lending in your Business Future?

Spring is here and we are drawing nearer to mid year. The time to plan for a big 3rd and 4th quarter is now! By pondering your business goals and planning the steps you will take to achieve them, you’ll be better able to assess your businesses’ financial needs going forward. If you think you’ll need additional capital for marketing, advertising, working capital, or growth, you can consider solutions such as cash flow lending and investigate your business financing options ahead of time. It’s always smart to know your options before you really need the money!

Cash flow doesn't have to be complicated. Indeed, most cash flow problems have common causes. The following are the four factors that are most often at the root of cash flow problems, as well as advice on how to avoid or overcome them.

1. Not Paying Attention to Expenses - Many businesses end up in a cash flow crunch due to unexpected expenses (for example, costly repairs to equipment, replacing malfunctioning technology or a natural disaster) or too much money going out each month (such as ongoing expenses that have quietly crept up to an unsustainable level). Resolving a cash flow crisis requires that business leadership take a renewed, vigorous look at their ongoing cost structure. Every business owner should have a rigorous process in place to track expenses on a monthly basis and project future expenses for the months ahead. A good business accountant can work with you to make sure you have an eye on the overall health of your business cash flow and are better positioned to anticipate challenges as they arise.

2. Uncertainty about Future Cash Flow - Some businesses are so caught up in the day-to-day grind of getting work done and paying bills that they don’t take time to anticipate what's coming in the next few months. Maintaining healthy cash flow requires a long-term vision. Most accounting experts recommend that every business maintain a six-month cash flow projection with expected revenue and expenses, while also adjusting for any seasonal peaks and valleys.

3. Slow-Paying Customers - Many cash flow problems are caused by a delay in receivables, such as when a company’s customers or clients are slow in paying their bills. Far too many companies allow their customers to become delinquent in paying them, often without fully realizing the problem until it is having a major impact on their cash flow. Business owners need to put consistent policies and procedures in place to ensure that customers pay in a timely fashion. It's especially important to clarify your payment terms and expectations on every invoice, whether that’s “payment due within 30 days” or “payment due upon receipt.” Don’t assume that your customers automatically know what to expect be clear about when you expect to be paid for your products or services.

Potential Reasons to Consider Cash Flow Lending

There are a lot of factors to consider when calculating your need for financing in the coming year. Here are some of the most important:

  1. Equipment

    Will your business need to invest in new equipment, such as machinery or computers, in the coming year? The initial outlay to purchase equipment (or even start a lease) can leave you temporarily short of cash. In this case, cash flow lending can be an ideal solution.

  2. Facility

    Do you plan to open a new location, expand to a bigger location, or move your business to a new address for whatever reason? The money required for moving—building out a new space, payments due at lease signing, not to mention the expense of hiring movers—can be hard to come up with all at once. Cash flow lending can help you get over the crunch so you’ll have a smooth move.

  3. Marketing

    Marketing and advertising are vital investments for any small business hoping to succeed in today’s highly competitive environment. If you’re planning to increase your marketing budget next year, as many small businesses are, cash flow financing can be a great way to get the money you need.

  4. Human resources

    In order to grow, your business needs to hire employees—and train them, and wait for them to get up to speed. It may take a while for the new hires to pay off in increased sales. In the meantime, you might struggle to make payroll. Fortunately, cash flow financing offers a simple way to tap into your unpaid invoices so you can rest assured that your employees will always get paid on time.

What Is Cash Flow Financing?

Small Business Cash flow lending is loaning money to companies based on the projected future cash flows of that company. A small business cash flow lender grants a loan that is backed by the business cash flows. By definition, this means that a company borrows money from expected revenues they anticipate they will receive in the future. Credit ratings are a bit more important in this form of lending, in addition to historical cash flows.

For example, a small business that is attempting to meet its payroll obligations might use cash flow finance to pay its employees now and payback the loan, any interest on the profits and revenues generated by the employees on a future date. These loans do not require any type of physical collateral like property or assets. Instead, small business cash flow lenders examine expected future company incomes, its credit rating and its enterprise value.

The advantage to this method is that a company can obtain financing much faster, as an appraisal of collateral is not required, and underwriting time is minimal.

Institutions underwrite cash flow based loans by determining credit capacity. Typically, they will use EBITDA (a company’s earnings before interest, taxes, depreciation, and amortization) along with a credit multiplier to calculate this figure. This financing method enables lenders to account for any risk brought on by sector and economic cycles. During an economic downturn, many companies will see a decline in their EBITDA, while the risk multiplier used by the bank will also decline. The combination of these two declining numbers will reduce the available credit capacity for an organization.

Cash flow loans are better suited to small businesses that maintain high margins on their balance sheets or lack enough in hard assets to offer as collateral.

Small businesses that meet these qualities and are a perfect fit to utilize cash flow loans include: retail stores, coffee shops, craft breweries, restaurants, healthcare practices, manufacturers and wholesalers. Interest rates for these loans are typically higher than the alternative due to the lack of physical collateral that can be obtained by the lender in the event of default.

As the name indicates, the lender is more concerned with inspecting your cash flow (usually bank statements) to approve your application. Turnaround time is another great feature of a cash flow loan, as funding usually takes place in a matter of days.

A cash flow loan may be used for any business expense, but some common uses are:

  • Working capital
  • High ROI short-term opportunities
  • Purchasing highly-discounted inventory
  • Payroll
  • Marketing
  • Business expansion

Have outstanding invoices? 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.

Ready to grow your business? If so, we have options and we're ready to help!