Cash flow funding is based on your business’ future cash flow or invoicing. Unlike asset based lending which looks at the value of your assets, inventory or equipment, cash flow lending bases a cash flow loan on what you have coming in. If you wait three months to receive payment for an invoice worth $15,000, your business stifles while you wait for your money. Cash flow lenders look at your invoices and offer cash flow loans based on a percentage of your future cash flow.
Increased competition among providers of cash flow loans means cash flow lending companies are willing to take larger risks to provide cash flow financing. Currently business owners in need of commercial cash flow lending can get an advance rate of 4 to 5 times the business’ earnings before interest, taxes, deprecation and amortization (EBITDA).
With cash flow lending, you pay a lower fee than you do with asset based lending. You already have the money to pay the cash flow lender, which means you have more flexibility than you do with asset based lenders. The standard term for a cash flow loan is three to seven years.
Cash flow funding provides your business with cash to:
- Use as working capital to cover your business expenses
- Acquire, merge or buy out other businesses
- Expand your business into new areas
Decide whether a cash flow loan serves the best interest of your businessAsk yourself if it's worth losing a percentage of your profit to have your money in your hands now. If your business gains clients, but you can't afford to hire new staff because you're waiting on invoices, you should look at how a cash flow financing provides you with the means to hire new staff.
Use a reputable cash flow lenderAs new companies enter the field, you need to make sure that you choose a lender with a good reputation. Look for comparable rates and fees with limited oversight from the company.
Check with the bank that handles your business accountsMany banks now offer cash flow lending as a source of business finance. Your bank already has the financial information it needs to make a commercial cash flow loan decision. Plus it never hurts to be have a relationship with the lender prior to requesting a cash flow loan.
- Cash flow lenders look more at the credit worthiness of your clients than at your personal or business credit.
- Some cash flow loan lenders only work with certain industries. Verify that the lender you choose works with your industry before pursuing a cash flow loan.