3 Examples of Cash Flow Finance Loans

Jul 27, 2022

George Holmes

George Holmes

Managing Director + Co-Founder

As a business owner, your main priority is to ensure the day to day running of your business, and this means you need to maintain an undisrupted cash flow. Unfortunately, there may be instances where your cash flow is disrupted, either because you have unforeseen bills and expenses, you’re waiting to be paid by a client, or because your business is seasonal and you’re in a quiet period.

If your cash flow is hindered, you may struggle to pay suppliers, employees, and bills, and this can cause huge issues for your business. This is where cash flow finance loans can help. In this blog, we’re going to provide you with three examples of cash flow finance loans, as well as the scenarios in which they could be useful to your business.

Why Are Cash Flow Loans Needed?

Before we get into the types of cash flow loans, let’s first look at why they might be needed. We’ve briefly introduced some of the reasons why you might need to fall back on a cash flow loan, but here are a few more circumstances that commonly push businesses to take out this type of loan:

  • Emergency bills or costs that you don’t have the immediate capital for, e.g. replacing or repairing equipment or machinery at short notice
  • Paying your staff and/or paying to train new employees
  • Buying inventory and materials, e.g. building supplies if you’re in construction
  • Covering daily operational costs whilst waiting for clients to pay invoices

Some businesses may be more susceptible to cash flow issues than others. If you sell winter clothes and equipment, you will likely find that business is booming as the weather turns, but during the summer months it’s quiet. That’s not to say that your business is unsustainable, but you may struggle during the quieter periods to meet your financial obligations.

Other businesses, like those in construction, may need cash flow financing if they’re waiting for invoices to be paid by clients. It’s not uncommon to offer extended payment terms, but in the gap that ensues between the work being carried out and the invoice being paid, there can be financial gaps that mean there’s not enough available capital to pay employees or buy materials to start new jobs, or even to use for merchant cash advances. Cash flow loans work by giving businesses cash upfront which is then paid back later, therefore providing a solution to this problem.

Most businesses will need cash flow financing at some point, but it’s important to source the right type of financing for your needs. There are lots of different types of cash flow finance loans, but here are three of the most common:

1. Invoice Finance

If you agree extended payment terms with your clients, such as giving them the option to pay their invoice in 90 days, you might find yourself in need of a money boost before the invoice is paid. This is where invoice finance comes into play. In summary, a lender will pay you up to 90% of your outstanding unpaid invoices, and then you pay the lender back (with interest) when you receive payments for your invoices.

There are a few different types of invoice financing. They are:

  • Selective invoice financing: A lender will pay one invoice for you, typically a larger value invoice, instead of multiple invoices
  • Invoice factoring: A lender will pay multiple invoices for you and liaise with your clients directly to get payment for the invoices
  • Invoice discounting: A lender will pay multiple invoices for you, but you remain the point of contact with your clients and it’s your responsibility to chase them for payment

Some lenders offer subscription based invoice financing agreements, whilst others provide a one-off service. Interest rates also vary from lender to lender.

2. Merchant Cash Advance

Another common type of cash flow financing is a merchant cash advance. Also known as a PDQ cash advance or a business cash advance, this type of loan is often used by seasonal businesses that experience quiet periods throughout the year. Through PDQ cash advances, a lender will provide you with credit upfront and repayments will be automatically taken from a PDQ card machine when you make sales. Lending is based on expected future cash flows. When sales are slow, a smaller repayment is taken, but when they’re higher, more money can be repaid. You only repay when you make money, which makes it ideal for seasonal companies who might not be able to afford other types of loan repayments during the quiet season.

You will agree to a minimum repayment percentage term. For example, you might agree with the lender that they will take 10% of all your credit card sales until your loan is repaid. That means if a customer pays you £100 via card, the lender will automatically receive £10 and you would keep the remaining £90. This continues until you’ve paid the balance of what you owe. The amount you’re entitled to borrow will depend on your credit score, predicted future cash flow, and your credit history.

3. Revolving Credit Facility

The third type of cash flow finance we’re going to talk about is a revolving credit facility. This is comparable to a personal overdraft, but it’s for your business. It is a good option to have on hand as a backup should you need it. You’ll apply to a lender and, based on your credit score and history, as well as some affordability tests, they’ll agree to offer you a set amount of money that is accessible to you whenever you need it.

Like an overdraft, you can dip into it and pay it off when you need to and are able to. As long as you pay off what you use, your balance will be refreshed and can continue to be accessed. You don’t need to apply for credit time and again, making this an efficient cash flow finance option if time is of the essence.

Applying for Cash Flow Financing

There are lots of other types of cash flow finance available, but the above three are some of the most commonly used. Like all types of credit, cash flow loans and cash flow lending is a type of debt that needs to be repaid. You will enter into a credit agreement that outlines the working capital you need. Your business finance details will be required so that cash flow lenders can determine your eligibility. A credit agency will look over your credit history to determine whether you can afford the repayments for your cash flow lending agreements.

Like any loan agreement, late payments for business financing incurs penalties. Unsecured loans, even for cash flow loans, will likely require a personal guarantee. If business owners who have taken out cash flow financing and can’t afford the repayments, the personal guarantor who undersigned the debt financing agreement will be liable to pay. Your business’ credit score may be affected by this.

For secured cash flow business loans, collateral will be needed. This can be an issue for small business owners or startups who don’t have the provisions to take out asset based lending, but for those who do have business assets, if you fail to pay what you owe, you will find that they get taken if you can’t pay.

These are all factors to consider when looking at cash flow financing and the type of cash flow loans that could work for you.

At Aurora Capital, we match businesses with cash flow loan lenders that can provide the right type of business funding for them. We can provide advice on which type of cash flow loan is right for you if you’re not sure, and we can help you access competitive finance with a short turnaround time. Our team will talk you through your financing options, the application process, and help you as you seek to improve your company’s cash flow at a competitive rate that you can afford. If you’d like more information, please contact us.

Visit our Knowledge Hub for more information about cash flow finance loans, how to apply and more!

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