The Definitive Guide to Cash Flow Loans for Small Businesses

Cash flow loans for small businesses

Small businesses often lack access to the funds they require to stimulate growth. They need to invest money in their business to improve cash flow and build the business, but perhaps lack the collateral needed to secure a traditional asset-based bank loan.

Working capital and cash flow statements

Businesses require working capital to operate. It pays overhead expenses, ensures staff are paid promptly, and secures the goods and services needed to run a business. This is particularly vital in a B2B situation, where keeping the supply chain moving is paramount.

Working capital is especially valuable when looking to drive growth. Investment in inventory management and capital expenditures may be a priority if a business has had a sudden increase in demand, perhaps from positive media attention or a particularly successful marketing campaign.

Some businesses are seasonal and able to use their downtime to improve their offerings, at a time when there isn’t as much, or sometimes any, revenue coming in. Extra working capital or cash reserves can aid in taking advantage of buying in bulk and benefiting from bulk discounting. Repairing and replacing vital equipment when it unexpectedly fails could pose huge problems if it were necessary during a given time when cash flow isn’t bountiful.

Directly related to working capital is cash flow. Businesses need strong positive cash flow in order to grow, but there are many roadblocks small businesses must address to harness funding and drive growth. If bookkeeping systems are delaying accounts receivable processes, cash flow will suffer. If the accounting software is out-of-date or lacks functionality, cash flow may suffer. And when there are cash flow problems, the business may not have the right amount of money to cover business expenses and accounts payable—let alone fulfill a business plan for growth.

Managing cash flow, avoiding negative cash flow, and generally making sure there’s enough cash for operating expenses are common themes for most businesses. Fortunately, finding the right financing solutions can often solve a business’s cash flow issues in the interim and allow the business to grow enough to not face these issues in the future.

Small business loans

Small business loans

There are various avenues and financing options available for small businesses based on their business needs, financial health, credit score, and annual revenue.

Bank loans from financial institutions have been the traditional route, however, the requirements and lengthy application process required to secure such a loan can be a significant barrier for entrepreneurs or small businesses.

A bank loan is asset-based, which means collateral is required to secure financing. This may be property, machinery, or another asset owned by the business. Asset-based bank loans offer businesses the bonus of much lower interest rates than cash flow loans but are significantly slower, and pledging business assets (including real estate) to secure a loan may push this type of financing out of reach for small businesses.

Other business funding including lines of credit and even business credit cards may be difficult to secure, especially for a startup or a small business that doesn’t meet minimum thresholds.

One solution for any B2B company is accessible through the process of digital net terms. While traditional financing looks at a company’s credit score, income history, and overall creditworthiness, digital net terms look at the other side of accounting—the customer.

Companies like Resolve work with B2B businesses to provide access to discrete business credit checks. When businesses outsource their business credit checks to Resolve, Resolve determines the customer’s creditworthiness, the right amount of credit to extend to each customer, and helps with [net terms] enrolment. They also assist with providing short-term operating cash flow in the form of optional cash advances up on top 90% of the invoice.

If a company works with Resolve, their buyers access their account information through Resolve’s online payment portal (branded with the business’ information) and makes B2B payments through the portal via different payment methods including credit card, ACH, wire transfer, or even by sending a paper check. Resolve pays the business up to 90% of each invoice directly into their bank account within one day but customers have the entire duration of their net terms agreement to make full payment.

This type of modern solution improves the customer experience while providing businesses of any size with the immediate cash flow they need for regular operating activities as well optimizing growth opportunities.

Interest rates: credit card, line of credit, or short-term cash flow loan

There is a significant disparity in interest rates and repayment terms offered by various types of cash flow financing providers, especially when compared with a bank or SBA loan.

Many small businesses use business credit cards, where interest rates depend on the business’ credit score, and can range from approximately 13% to 20% APR (annual percentage rate). As credit card purchases tend to be smaller and are paid back fairly quickly in most cases, this is manageable for businesses. While credit cards are perfect for low operational costs and building a credit history, they are not ideal for larger purchases or investing in growth. Any business with bad credit or a poor credit report will likely not qualify.

A business line of credit, by comparison, may have an interest rate around the 8% mark. A term business loan may have a rate of 7%.

Short-term cash flow loans attract higher interest rates due to the increased risk associated with lending, and it can be complicated to calculate the APR. Interest and fees combined could potentially come to the equivalent of between 11 and 90%, so it is very important to do due diligence on this type of loan.

Credit score and cash flow problems

When applying for small business loans, credit scores are taken into account differently depending upon the type of financing solution. A bank will have different metrics for approving business financing compared to a cash flow loan provider. If your business is new, you won’t have a long credit history for the bank to examine, so even if sales are steady and cash flow is strong, this type of lending may be out of reach.

The past few years has been difficult for many businesses, and their credit scores may reflect this. As many companies struggled, credit card borrowing increased, meaning credit scores were not as perfect as they were pre-pandemic. This impacts eligibility and may decrease funding options.

Fortunately, cash flow loan providers are more interested in cash flow projections rather than credit history, allowing more businesses to access finance to grow their operations while improving their cash position.

Short term loans

Short-term loans have a lot in common with conventional term loans. They are generally smaller in scale, and have a shorter repayment window of 18 months or less, but are structured in a similar way to a regular bank loan. Payments are scheduled regularly over the term of the borrowing and interest rates are clearly stated. Funding is quick, allowing the business to put the funds to work immediately.

This may still be a prohibitive option if a business is less than a year old.

Line of credit

As with a credit card, a business line of credit provides instant access to revolving funds. They do require an existing relationship with the traditional lender or bank, as they are a more formal agreement than a credit card is.

A line of credit offers a great deal of flexibility as funds are available at any time, so long as the credit limit isn’t exceeded, and can be used for any business purpose. There is no prepayment penalty for paying off the entire amount owing at any time. This arrangement offers far more convenience than putting in individual loan applications for new expenses as they arise. Interest is only charged on the outstanding amount owed.

Merchant cash advances

Merchant cash advances can be a good fit for businesses that accept the majority of their payments via credit or debit card. This type of financing involves a merchant cash advance company advancing the borrower a set amount of cash upfront. The borrower then repays the advance, plus interest, through a percentage of their daily credit and debit card sales.

When adopting this type of cash flow loan, it is important to take into consideration that daily cash flow will be lessened as the advance is repaid each day. Merchant cash advances are a very expensive way of accessing additional working capital, and if this is the only option available, it’s essential to choose a reputable lender. Checking for reviews of a lender online and through the BBB is a good place to start with looking up a business’ reputation.

SBA loans

SBA loans are small business loans partially guaranteed by the United States Small Business Administration. Their lending criteria are tight, but they offer many benefits not seen in other small business cash flow solutions.

Uniquely in the cash flow loan options landscape, SBA loans are applied for via a bank or credit union, who then applies to the SBA for a loan guarantee. According to the loan terms, if a company defaults on its loan, the government pays the lender back the outstanding amount.

However, everyone with at least 20% ownership in the company must make a personal guarantee on an SBA loan. This puts personal assets in jeopardy should the loan go into default, and may also impact personal credit scores. SBA loans offer lump sum payouts with have longer terms, and lower interest rates, than many other options. If a business fits the criteria for qualifying, this is an excellent option.

Invoice financing

Invoice financing helps growing businesses fulfill their orders when their own inventory may be low. A relatively new business, still building a customer base, with limited working capital available, can harness invoice financing on their receivables to drive growth. Some companies even use invoice factoring as a financing option.

Customers are now also finding innovate ways to finance their own sales through reverse factoring.

A lender evaluates outstanding invoices and the customer’s ability to repay the loan, then advances a percentage of those outstanding invoices using the invoices as collateral. This allows the supply chain to keep moving without the delay of a 30, 60, or 90-day wait on payment from customers. This type of cash flow loan is not classified as a loan, per se, as it is technically secured by the customer’s invoice. However, it can be an excellent way to free up working capital in an emerging or small to medium-sized business.

OnDeck: working capital loans

OnDeck is a US and Canada-based provider of working capital loans. Unlike many online lenders, who concentrate on one type of lending, Ondeck offers tailored lending with multiple loan types, providing businesses with the option to overcome cash bumps, unexpected expenses, emergency repairs, and start-up costs.

Short-term unsecured business loans, secured small business loans, and lending specifically tailored to many industries are among their offerings. By taking industry-specific requirements into account, financing can be structured in a way that supports business growth without applying extra stress or confusion to the business owner. They also offer clearly defined terms and monthly payments that fit with the way the business operates.

Other companies offering small business financing include Bluevine and Fundbox.

A young businessman overcomes an obstacle to success: Cash flow

Lenders and cash flow management

Cash flow lending essentially involves a business borrowing from a portion of the cash flow they anticipate generating in the future. Because much of this lending is happening outside of legacy banking systems, it is important to carefully research lenders. They need to be reputable, and clearly state the fees, APR, and terms of borrowing.

Many providers of cash flow loans for small businesses are fintech companies who are constantly diversifying their offerings, especially in the B2B landscape. Some focus purely on lines of credit. Others offer term loans, invoice financing, or digital net terms. Some of the more impressive lending solutions have been acquired by larger companies, for example, Kabbage, was acquired by American Express in 2020.

When dealing in unsecured lending, carefully reading all of the information is extremely important for every business, and may help the business avoid catastrophic surprises in the future.

The bottom line: small business working capital loans

Small business owners face many hurdles and roadblocks as they work hard to drive growth and improve their bottom line. Investing in the business is essential when looking to expand, but attaining more property, staff, or equipment is expensive. Being able to secure financing from a bank would be ideal, but this can be slow, and challenging in many cases.

Fortunately, innovative loan providers are stepping away from the traditional metrics required for securing finance and making it easier for more businesses to access lending and inject more cash flow into their operations. New fintech solutions mean that these avenues are more easily accessible to businesses all over the world via well-designed technology. Instead of physically visiting a bank with a folder filled with paperwork, business owners can go online, research the options available to see which best fits their needs, and apply easily and quickly without having to leave their desks.

In these situations, approvals are quick, and funds are deposited sometimes the same day, allowing businesses to charge forward and grow. The diversification of the business lending market is a boost to small and medium businesses who may previously have been stuck in one spot, without enough working capital to move forward, and unable to access lending to keep them afloat.

If you’re interested in growing your business in an innovate way by boosting cash flow for your small business while offering risk-free net terms, request a demo with Resolve to find out more.

Learn B2B best practices.

Subscribe for tactical tips on growing your business and optimizing your net terms and receivables workflow.