Cash flow also gives your business greater flexibility in responding to emerging dilemmas or making critical decisions. Confidence in cash flow makes it easier to make critical purchases in the near term rather than waiting. It also allows you to disperse cash in the form of dividends to shareholders or owners. This strengthens the bond between the company and its owners. You also have the ability to offer favorable credit terms to attract new buyers if you are less desperate for cash.
Why getting to a position of excess cash flow is vital to a small business. (video)
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. 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 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