What is cash flow finance and how does it work?

Understanding the cash flow finance process

Cash flow is the lifeblood of any thriving business. Having a consistent stream of cash coming into the business enables you to pay your bills and plan for the future. Unfortunately, most SMEs have to endure periods when the cash doesn’t flow quite so freely, with seasonality, delayed payments and long lead times all taking their toll. 

When your working capital takes a hit, it pays to have a ready supply of short-term finance to provide a quick cash injection. Traditionally, businesses rely on bank loans, overdrafts and credit cards during these leaner times. However, they are not always sufficient or available, particularly if you have an adverse credit history. That’s where cash flow finance can help to bridge your funding gap.  

What is cash flow finance?

Cash flow finance is short-term, unsecured borrowing that provides a flexible source of working capital. In simple terms, it gives businesses access to future cash flows now. 

Cash flow finance allows you to secure a loan based on the money coming into the business. You then use that cash flow to repay the loan. It’s a lot like invoice finance, which gives B2B businesses instant access to the cash tied up in customer invoices. However, instead of customer invoices, it unlocks the value in your future cash flows. 

As an unsecured form of borrowing, there’s no requirement to provide company assets as collateral, although you may be required to provide a personal guarantee. That makes it a good fit for smaller businesses with strong cash flow projections but few valuable physical assets.

How does cash flow financing work?

The key difference between cash flow financing and a traditional loan is that the amount you can borrow and the repayment schedule are based on your cash flow projections. 

Here’s how the process works: 

• Cash flow assessment - The lender will evaluate your past, present and projected cash flow to determine the funding they can provide and the level of risk you present.
• Loan offer - If the lender is happy with the cash flow assessment, they will make you a loan offer. It will include details of the loan amount, interest rate and repayment term.
• Receive the cash - You receive the loan as a lump sum in your business’s account. You can use it to cover your working capital needs, such as payroll and rent, or invest in growth.
• Repayment - Loan terms usually range from six to 12 months and you repay the loan, with interest, in monthly instalments.   

What are the advantages and disadvantages of cash flow finance?

Advantages of cash flow finance

Speed - You must provide certain information, such as trading records, accounts and cash flow statements, but decisions are made quickly and the money can be available within days. 

Flexibility - You can borrow anything from a few thousand pounds to hundreds of thousands if you qualify. Repayment schedules can also be tailored to suit your circumstances and needs. 

No requirement for collateral - Unlike asset-based finance, you don’t have to give assets or equipment as collateral. That makes cash flow finance a viable option for smaller businesses.

Credit rating is less important - A bad credit rating is not usually a barrier to securing cash flow finance. If your future cash flow projections are healthy, you should be eligible for a loan.  

Disadvantages of cash flow finance

High interest rates - The short-term nature of the loan and the risks involved mean the interest rates are typically higher than on traditional bank loans. There may also be additional fees, so always compare lenders to find the best deal.  

Personal guarantees - You may be asked to provide a personal guarantee to secure the loan. That would make you personally liable for repaying the loan if the company defaults.  

Only for short-term use - Cash flow finance is not a long-term solution for managing your cash flow. It’s best suited to providing quick funding when you need it the most. 

Unlock your business growth

If you’d like to know more about cash flow finance and how it works or want help finding the right deal for your business, please contact our team. We bring you the best deals from the whole UK business finance market and our assistance won’t cost you a penny.