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What are cash flow loans for small businesses?
Business cash flow loans are a type of small business financing used to cover cash flow shortages. They provide working capital that businesses can use to pay for day-to-day operating expenses. Cash flow loans are paid back over time, often with revenue generated from the additional working capital of the loan.
Approval for cash flow financing is typically based on cash flow and projected performance. This is in contrast to asset-based loans, which are approved based on credit history and collateral such as inventory, accounts receivable, real estate, equipment or other business assets.
Several types of loans can be used as a cash flow loan. These include business lines of credit, term loans, invoice factoring and merchant cash advances.
Boost your cash flow with OnDeck.
OnDeck offers two funding options that can be used to increase working capital and help relieve cash flow gaps. For ongoing access to funding, an OnDeck Line of Credit offers revolving credit that can be drawn as needed. For one-time business needs and opportunities, an OnDeck Term Loan can be used to secure funding in a lump sum.
OnDeck Line of Credit
A revolving credit line you can draw from 24/7 to receive funds within seconds.*
- Credit limits from $6K - $100K
- Flexible repayment terms of 12, 18 or 24 months
- Great for ongoing cash flow needs
OnDeck Term Loan
A one-time lump sum of cash with an eventual option to apply for more.
- Loan amounts from $5K - $250K
- Repayment terms up to 24 months
- Great for one-time investments in your business
Are we a match? Check our minimum requirements.**
1 Year
in business
625
personal FICO® score
$100K
business annual revenue
Business
checking account
How does a cash flow loan work?
The way a cash flow loan works depends on the type of loan a borrower chooses. A term loan provides a lump sum of cash repaid in fixed installments of a specific period of time. With a line of credit, borrowers receive a credit limit they can borrow from as needed. Invoice financing and merchant cash advances provide funding as an advance on future revenue.
For all cash flow loans, however, the underwriting process will typically work a little differently than other small business loans. Instead of emphasizing assets or personal credit scores, lenders will usually focus on future revenue and cash flow projections. They may review your business bank statements (including income and expenses) to determine your creditworthiness and what you may qualify for. While cash flow lenders may additionally review your credit and time in business when evaluating your loan application, they don’t factor those aspects into their decision as much as traditional lenders.
Common Types of Cash Flow Loans for Small Businesses
There are several business funding options available to help small businesses secure working capital and improve their cash flow. OnDeck offers lines of credit and term loans.
Business line of credit
With a line of credit, a business receives a specific amount of available credit to draw from as operational expenses arise. As the money is repaid, the available credit replenishes for the business to draw from again without reapplying.
Invoice factoring
Invoice factoring is a type of invoice financing in which businesses sell their unpaid invoices to a factoring company. By doing this, they receive an advance on their revenue, giving them faster access to the capital. The downside is that businesses will sell these invoices at a factor rate, which means the factoring company will be buying the invoices for less than what they’re worth. The factoring company then takes on the collection process from the customer and earns a profit on the difference between what they bought the invoices for and what they collected.
Short-term business loan
A short-term business loan is one of the most common ways businesses boost short-term cash flow. With this type of loan, the business receives a lump sum of money and pays it back (with interest) over several months or a few years.
Merchant cash advance
A merchant cash advance is another unique type of business funding. With an MCA, a merchant cash advance provider reviews a business's credit and debit card sales and provides funding to the business as an advance on its future sales. Repayment is then generally done automatically as a percentage of the business’s daily or weekly debit and credit card sales until the advance is paid off.
Pros and Cons of Cash Flow Loans
Like any type of business financing, cash flow loans have pros and cons. Take them into consideration when you’re weighing your funding options.
Pros
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Fast application and funding
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More relaxed requirements
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May be unsecured
Cons
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Can be more costly than other funding
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Payments can be frequent (daily or weekly)
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May require a personal guarantee
How can I use a cash flow loan?
Business cash flow loans can be used for any legitimate business expense. Ideally, temporary cash flow loans help businesses make enough money to repay their loans (and provide a significant return on the investment). By providing working capital at a time when it would otherwise be limited, cash flow loans can allow businesses to:
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Add inventory at key times.
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Cover payroll in a pinch.
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Conduct product research.
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Hire new staff.
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Bridge seasonal shortfalls.
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Start a marketing campaign.
What’s the difference between cash flow-based and asset-based lending?
Cash flow-based lending and asset-based lending are two financing methods differentiated by their basis for approval.
Cash flow-based lending relies on the borrower’s future cash flows and overall financial health. Because of this, cash flow loans may not require collateral, which makes it riskier for the lender (and therefore more expensive for the borrower).
Asset-based lending is secured by specific business assets, such as inventory or receivables, making it less risky for lenders and more available to businesses with lower credit scores. Unlike unsecured loans, asset-based loan amounts are tied to the value of the collateral.
Each method suits different business needs, with cash flow-based lending focusing on future earnings and asset-based lending emphasizing existing assets.
Can I get a cash flow loan with bad credit?
Cash flow loans typically place more emphasis on business performance than on the borrower’s credit score. This means that borrowers with bad credit may have an easier time getting approved.
Still, a bad credit score can make it difficult to secure funding, even with cash flow loans. Here are some things to consider.
Alternative funding options. Online lenders and merchant cash advance providers tend to be more flexible than traditional lenders when it comes to customers with poor credit. They may consider factors beyond your credit score, such as the business’s cash flow, revenue and time in business. While these loans are easier to qualify for, they are also more expensive than traditional business loans.
Collateral. If you can offer collateral, you’ll increase your chances of securing a loan. This could come in the form of business assets, personal assets or even a personal guarantee or lien on your business.
Improve your credit. Take steps to boost your business credit. Pay down existing debt, make sure you pay on time and avoid taking on too much debt. These practices may allow you to qualify for funding with better rates and terms in the long run.
Consider a co-signer or partner. If you have someone willing to co-sign a loan with you, and that person has good credit, it may help your chances of being approved for a cash flow loan.
Learn more about cash flow loans.
Temporary cash flow loans can come from a handful of business funding providers, including:
Banks. Because most small businesses already have a relationship with a bank due to their business checking account, bank loans are commonly the first thing many think to look for to cover a cash flow shortage.
Online lenders. Online lenders can often provide a faster and more convenient way to apply for and receive the amount of cash that businesses need when they want to free up some working capital. While online loans are faster and easier than traditional loans, they generally come with higher interest rates.
Factoring companies. Some financing companies specialize in a type of financing called invoice factoring. This refers to when a business “sells” its outstanding invoices, otherwise known as its accounts receivable, for an upfront sum of money. Once the invoice is paid, the business will get the remaining amount, less the interest that has accrued since the money was issued.
Vendors and suppliers. For small businesses that are on good terms with their vendors and suppliers, trade credit may be an option to help with temporary cash flow. A business can negotiate pricing and payment terms to work with the seasonality of their business.
Temporary negative cash flow is a period of time in which the business’s cash outflow exceeds its cash inflow. Simply put, the business is spending more than it’s taking in. Negative cash flow is common for startup companies and new small businesses. For this reason, it’s a good idea for small business owners to create cash flow forecasts and maintain cash flow statements to keep track of the health of the business.
Cash flow forecasting refers to estimating the cash inflow and cash outflow of a business over a specific period of time. These can be used to predict the business’s future cash positions, avoid cash flow shortages and maximize a return during times when cash flow is strongest.
A cash flow statement is a financial statement that details the movement of cash (and cash equivalents) going in and out of a business. It can be used to monitor how well a business generates cash to pay debt and fund its operating expenses.