Even if your small business is growing, you may find yourself needing extra cash to cover day-to-day expenses such as payroll, rent and inventory, or to pay for short-term projects that could grow your revenue in the long run. Uneven cash flow is one of the biggest challenges of small businesses throughout all industries. In a perfect world, you’d walk into your local bank and walk out with a business loan long before you wound up in a cash crunch. Well, those days are long gone! If you haven’t been in business at least two years, or lack good credit and collateral, chances are a traditional bank loan is never going to happen. In order to deal with this shortfall, a cash flow loan may be your best option.
What is Small Business Cash Flow Lending?
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, 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
- Business expansion
Short-term cash flow loans are best used for short-term projects that would divert money from day-to-day expenses but ultimately grow your business, like taking on a big contract with a major company or adding extra seating in your restaurant, or craft brewery taproom. If you need cash fast, a cash flow loan may be your lifeline.
LVRG Funding is one of the nations largest and most trusted resources of small business cash flow loans. Want to know if a small business cash flow loan is right for your business, give us a call (855) 998-5874. We're here to help!