In business, an ever-growing number of businesses, especially small ones, regularly seek out some sort of debt financing to secure some necessary funds to grow their businesses. This can be for a number of reasons including opening a new store location or another branch or simply buying more stocks during seasonal fluctuations. And truthfully, it really is not entirely hard to find a suitable loan to finance these sort of things. In fact, taking out loans is so easy you can almost do it in your sleep. However, as a smart businessman, you need to be smart about the loans you take. On the one hand, you want a substantial capital to sustain your business effectively. On the other hand, you don’t want to end up on a pile of debt that you can’t pay.
So what’s the solution? Three words. Cash Flow Financing. Cash flow loans typically strike a balance between APR, loan size, and the difficulty and length of the application process. It’s the kind of business financing that won’t land you in trouble if you are careful. So what is cash flow financing and why should you use one?
Cash Flow Financing In A Nutshell
According to Investopedia,
“Cash flow financing is a form of financing where a loan made to a company account is backed by the company’s expected cash flows. Cash Flow financing differs from an asset-backed loan, in which the collateral for the loan is based on the company’s assets. The timeframe of the repayments for cash-flow loans are based on the company’s projected future cash flows.”
Cash flow finance is usually suited for companies with a steady growth of cash inflows. It is also recommended for businesses that require an upfront investment to generate more profit or revenue. Simply put, a business borrows money they are already expecting to receive in the future in exchange for giving an investor or lender the rights to an agreed portion of the receivable profit.
Cash flow finance often comes as short-term loans, credit line, or working capital. They can be paid off through weekly, bi-weekly, or monthly dividend payments. On an investor’s side, it’s also a smart opportunity to put money in a business with a steady net income that is able to cover all debt obligations. It’s a win-win situation on both sides.
When should you use Cash Flow Finance?
Common uses for cash flow financing can come in a variety of business needs:
- Invest in physical inventory and stocks.
- Preparation for seasonal or peak periods.
- Opening a physical store or in some e-commerce shop’s case, a Brick and Mortar location.
- If you’re looking to lock in a good deal for the merchandise, you are selling.
- You need additional staff or workforce.
- An opening of another branch location.
What are the types of Cash Flow you can get?
Cash Flow can come in many ways. Here are 5 of the most common types of cash flow financing.
Term Loans – Much like mortgages or student loans, cash flow financing can also come in the form of a term loan. Essentially, you borrow an amount upfront and pay it back in fixed weekly or monthly payments throughout the agreed-upon term of the loan agreement.
Business Credit Cards – Perfect for your business’ short-term needs, business credit cards are used to finance projects that can be typically paid back fully within a month. It is relatively easy to access business credit cards if your business has a good finance and credit reputation.
Credit Lines – Unlike business credit cards, credit lines are a more formal agreement between lender and borrower. Credit lines are also typically only given to companies that already have established relationships with banks or other financial institutions. This is perfect for covering seasonal cash flow gaps.
Invoice Financing – If your business needs upfront capital to fulfill a short-term need for a big project, invoice financing is the way to go. Basically, you will borrow the amount of money that you’ll be expecting to get from your customers once the order is fulfilled.
Merchant Cash Advance – A Merchant Cash Advance isn’t necessarily a loan, per se. It’s an advance payment against your company’s future income. Terms can be as short as 90 days or as long as one year or more. You get a lump sum that is paid using a percentage of your daily credit card receipts.
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