Cash flow financing is a form of debt financing for small businesses. Unlike other forms of debt financing, such as business loans or merchant cash advances, lenders look at a company’s expected future revenue and cash inflows to gauge its ability to repay the loan.
Typically, finance teams analyze cash flows every month. With a strategic finance platform like Mosaic, this time-consuming process is streamlined and offers more immediate, real-time insights.
What is a Cash Flow Financing Platform?
A cash flow financing platform allows small businesses to apply for short-term business finance based on their predicted future revenue. This type of financing is typically less risky than an asset-backed loan because the lender only takes your company’s credit history and current cash inflows and outflows into account – your personal or business assets don’t play a role.
This can be an excellent option for companies that need extra capital to bridge a temporary cash-flow gap, such as those affected by the coronavirus pandemic and requiring funding to cover expenses such as staff wages. It can also help companies that are growing and need to make investments in their business that will generate a return in the long term, such as hiring new team members or upgrading equipment.
Another form of cash flow financing platform is invoice finance, also known as factoring. This works by leveraging your outstanding accounts receivable to lend you cash. This can be helpful for businesses that have reached top-tier supplier status with large corporations or government agencies, as these organizations may already be set up to pay invoices within 90 days.
A business line of credit is a similar form of cash flow financing but differs from a traditional loan in that you can access the funds as needed and only have to pay interest on what you use. This can be useful for companies that need to bridge a gap, such as those dealing with seasonal dips in sales or requiring short-term finance to invest in their marketing or expansion efforts.
How Does a Cash Flow Financing Platform Work?
A cash flow financing platform is a newer form of business funding focusing on the company’s current and future revenue rather than its assets. It is an unsecured loan that can be used to cover day-to-day expenses like inventory, payroll, rent, and more, and it is repaid using the business’s incoming cash flows. These loans are generally repaid over one to three years, with higher interest rates than conventional business loans.
The lender typically reviews the projected income and expenses of the business to determine if it’s a good fit for a cash-flow financing solution. This differs from traditional bank loans, which look at a broad range of factors to evaluate the risk of lending to a business.
Several cash flow financing solutions are available for businesses, including business lines of credit and invoice financing (also known as factoring). Invoice financing uses a business’s accounts receivables to create a line of credit that can be used as needed. Like a business credit card, the business owner only pays interest on the amount they use.
A business line of credit functions similarly to a merchant cash advance, but it is more formal and usually requires the existing relationship between the lender and the borrower. The lender will put a lien on the company’s assets, but unlike asset-based finance, it doesn’t require a physical asset to be repossessed in case of default.
What are the Benefits of Using a Cash Flow Financing Platform?
Unlike traditional business loans, cash flow financing platforms consider several factors when approving or declining a loan application. Lenders use data such as transaction frequency and volume, seasonal sales, expenses, returning customer income, and more to create a credit risk assessment model. They also consider a company’s credit history to determine the amount of financing they can offer.
This type of financing is ideal for companies that don’t have the time or resources to prepare their credit files for a bank loan and can’t offer physical assets as collateral. It can also meet short-term business needs, such as paying for inventory or hiring new staff during a slow period.
Additionally, cash flow financing platforms are more flexible than traditional banks. They typically update a company’s data in real time so the lender can adjust the loan terms based on unforeseen circumstances. This is helpful for companies that don’t have a long credit history or strong revenue growth but could still be at risk of delinquency due to unexpected events.
If you are looking for funding for your small business, it’s essential to do your research and compare lenders before applying. You can reach over 200 different lenders and financing options on our platform in just a few minutes.
How Can a Cash Flow Financing Platform Help My Business?
A cash flow financing platform can help your business in various ways. For example, it can provide a credit line that allows you to access a set amount of funds when needed quickly. This can be helpful if you have seasonal fluctuations in your cash flow.
It can also help you finance growth initiatives. For instance, if you want to expand your marketing efforts to increase customer acquisition, you can use the funds from a cash flow financing platform to fund that initiative.
This type of financing differs from asset-based lending, as it emphasizes your company’s future cash flows more than its past performance and current assets. This can make it easier for small businesses that need a strong credit history or tangible assets to obtain funding.
It’s essential to remember that a cash flow financing platform is different from a traditional bank loan, which usually requires more rigorous underwriting processes. You will likely need to submit detailed financial reports, an income summary for the last three years, and an expected cash flow forecast for the next 12 months. If you cannot meet these requirements, you may have to resort to other types of financing. This can include invoice factoring or a business line of credit, often faster and less risky than traditional bank loans.