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Blog
Nov 29, 2023
5 min read
Last update: Nov 30, 2023

The Power of Cash Flow Financing for Small Businesses

Facing a slow season? Cash flow financing can be your lifeline, providing the funding your business needs to stay afloat in challenging times.

With this lending option, businesses can borrow money from lenders like banks, online lenders, angel investors, and credit unions to make payroll, purchase more inventory, and manage their operating activities. 

But what is cash flow financing? And how will you know if this option is right for your business?

In this guide, we’ll cover everything you need to know about cash flow financing so you can make an informed decision. 

What is Cash Flow Financing?

Cash flow financing refers to the process of securing a business loan in exchange for a company’s incoming cash flow as collateral. Generally speaking, the lender will agree to give the borrower funding based on their credit profile. 

The borrower will then agree to pay the loan back, with interest, by using their business proceeds. Cash flow financing is a catch-all term for various funding options, including invoice financing and business lines of credit. 

Below, we’ll explain how cash flow financing works, the different types to consider, and the best times to apply. 

How Does Cash Flow Financing Work?

If your company generates positive cash flow, a lender will analyze your cash flow from financing activities and make a lending decision. The funding you’ll be approved for will depend on the information found on your cash flow statement, as well as other factors, which include:

  • Credit Score: Your business credit score will significantly influence your funding. With a good credit history, getting favorable financing with low interest rates will become much easier. 
  • Time in Business: Lenders also want to see how long you’ve been in business. Preference is generally given to entrepreneurs who have been in business for at least six months. 
  • Annual Revenue: Your yearly revenue will also impact your application. Lenders are concerned about seeing if you have the incoming capital to pay them back and will analyze your cash inflows and cash outflows. 

With cash flow financing, small business owners borrow from their future cash inflows. Once approved for funding, your lender will set up a repayment schedule based on your projected cash flow. 

What are the Different Types of Cash Flow Financing?

Cash flow financing can be an umbrella term for many different funding options. The most common types of cash flow financing are:

  • Invoice Financing: Invoice financing refers to the process of applying for funding with your invoices, or accounts receivable, as collateral. The lender agrees to take possession of an invoice so you can repay your loan later. 
  • Merchant Cash Advances: A merchant cash advance is a financing option that focuses on the percentage of the borrower’s credit or debit card sales. Essentially, the lender gives you cash equivalents on the sales you anticipate bringing in later. 
  • Business Lines of Credit: A business line of credit is a funding extension that works like a credit card. Your lender will assign you a revolving line of credit with a limit based on your company’s financial strength. 

When Should You Apply?

Business owners often turn to cash flow financing as an ideal solution for the following scenarios: 

  • You want (or need) to hire more employees.
  • Your business needs to expand its inventory. 
  • Your business needs to prepare for upcoming peak seasons. 
  • You want to add a brick-and-mortar location for your business. 
  • Your business has received a promising deal, and you want to take advantage of it quickly. 

Fund your growth opportunities, bridge the gap during seasonal dips, or manage unexpected costs with cash flow financing. 

Benefits of Cash Flow Financing for Small Businesses

Cash flow financing offers significant benefits for borrowers, which include:

  • Focus on Running Your Business: With cash flow financing, you fund your essential overhead expenses. This way, you can focus your incoming capital on other endeavors, such as investing in business growth opportunities or optimizing your accounts payable. 
  • A Variety of Cash Flow Loans Available: There is a wide range of cash flow loans you can choose from, including term loans, small business loans, business credit cards, credit lines, invoice financing, and merchant cash advances.
  • No Need for Collateral: Your net cash flow counts as collateral toward the financing, meaning you don’t have to give up any real estate or tangible assets to apply. 
  • Improved Cash Flow Management: Cash flow financing offers convenient access to funding. With more money coming into your business, you can manage your overhead expenses and avoid falling behind. 
  • Predictable Cash Flow: Cash flow financing gives your business a predictable lump sum based on future earnings. You know how much you’re receiving and how much you’ll have to pay back, just like a traditional bank loan. 
  • Working Capital Stability: Securing cash flow financing keeps your working capital stable to keep your business functional throughout the year. 
  • Quick and Easy Access to Funds: Once approved, your business can receive funding in a few days. Some online lenders even offer same-day financing directly to your bank account. This way, you can secure enough cash to pay past-due invoices and make payroll on time. 
  • Flexibility and Scalability: There are many types of cash flow financing options to suit virtually any small business. 

And while the benefits are substantial, there are a few drawbacks business owners may want to consider before they go all-in on cash flow financing: 

  • Substantial Financial Proof Required: To get approved for cash flow financing, you’ll have to show proof of your company’s operating cash flow over a long period of time. If you don’t have negative cash flow, this option may not be suitable for you. 
  • You May Need Good Credit: Some lenders only approve applications from businesses with good or excellent credit. If your business credit score falls short, you may not qualify. 
  • Not Suitable for the Long Term: Cash flow financing is ideal only for managing short-term expenses. It’s not wise to continue borrowing from your future cash flows if you need more funding. 
  • You’ll Need Strong Business History: If you run a startup or a new business, applying for cash flow financing may be difficult. Lenders commonly approve applications from businesses open at least six months. 

Qualifying for Cash Flow Financing

Not all lenders are created equal. However, most lenders require that borrowers fulfill the following eligibility criteria to apply:

  • Financial Documentation: Your financial statements will ultimately influence the success of your application. You’ll need to submit a statement of cash flows in addition to a balance sheet, bank statements, a profit-loss (P&L) statement, and a net income statement. 
  • Credit Score: Your business credit score provides lenders with a snapshot of your creditworthiness and repayment history. A higher credit score indicates a lower risk of default, which reassures lenders that you’re a trustworthy candidate likely to make timely payments. 
  • Time in Business: To apply for cash flow financing, you’ll need to show that your business has been operational for at least six months. Specific conditions will vary based on the lender. 

Partner With SBG Funding for Cash Flow Financing

Cash flow financing is a flexible and accessible financial lifeline if you need short-term financing for your business. Navigate your way through a changing financial landscape by leveraging financial earnings to cover operating expenses and achieve stability. 
If you’re interested in applying for business financing, look no further than SBG Funding. We offer financing options that can grow your business through every season. Get started with our quick, three-step application process.

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