Key Takeaways
- Cash flow lending is an umbrella term for any type of borrowing that supports a business's cash flow.
- Cash flow lending can come in the form of secured and unsecured loans, overdraft facilities, invoice finance, capital raise against equipment, and business private lending.
- The main purpose of cash flow lending is to support business operations by injecting working capital to support cash flow.
- Cash flow lending is an overall term for lending that supports cash flow, while asset-based lending is based on using assets as security.
- Before applying for cash flow loans, ensure that you assess your business's current cash flow and understand your credit score as well as projected income.
In business, having access to working capital and maintaining a strong cash flow are critical to success. However, many issues can have a dramatic impact on keeping your business surviving and thriving during tough times.
Cash flow lending in Australia provides a practical solution for businesses so they can cover essential costs and keep their operations going. Let’s explore what cash flow lending is, how it works, and what its advantages are for business owners.
What Is Cash Flow Lending?
Cash flow lending is any type of lending where the purpose of the loan is to inject working capital to support future cash flow. Cash flow lending is a catch-all term and can come in many forms. Secured and unsecured loans, overdraft facilities, invoice finance, and more, fall under cash flow lending since they provide working capital to businesses that need it.
What is the Main Purpose of Cash Flow Lending?
The primary purpose of cash flow lending is to provide businesses with the necessary funds to maintain operations, manage working capital, or invest in growth opportunities.
Businesses often use cash flow lending to:
- Cover day-to-day operational costs such as payroll, rent, and utilities
- Manage seasonal fluctuations in revenue
- Respond to unexpected expenses or cash flow shortfalls
- Cover emergencies or equipment breakdowns
- Support marketing or sales initiatives
- Fund expansion projects or new product lines
In short, cash flow lending for businesses provides a lifeline that allows companies to maintain smooth operations and continue growing, even during times of financial strain.
How Does Cash Flow Lending Work?
Small business cash flow lending works by leveraging a company’s income or balance sheet to secure working capital. Here are some forms of cash flow lending and how they work:
Secured Loans
A secured loan is a type of cash-flow lending that requires businesses to pledge security, such as property, equipment, or other valuable assets, in exchange for financing. The value of the security often influences the loan amount, making it possible for businesses to access larger sums at lower interest rates. Secured loans are ideal for businesses with significant assets and stable cash flow, as they provide both the lender and borrower with a higher level of security.
Unsecured Loans
Unsecured loans do not require any form of security, relying instead on the business’s cash flow and the director’s credit score. Unsecured loans sometimes come with higher interest rates but are often assessed and funded inside 24 hours.
Overdraft Facility
An overdraft facility is a flexible lending arrangement that allows businesses to withdraw from a pre-approved credit limit. This type of cash flow lending is particularly useful for managing short-term cash flow fluctuations, such as covering expenses while awaiting payment from customers. Interest is only charged on the amount overdrawn, and the facility renews once you repay what you’ve borrowed.
Invoice Finance
Invoice financing is a line of credit solution wherein you use unpaid invoices to secure funding for your business. You can access a percentage of your invoices, often up to 85%, on the same day the invoice is issued. This way, you don’t need to wait for delayed or late payments to access much-needed capital. Once your customers pay in full, the lender deducts fees from the remaining percentage and remits the balance back to the business.
For example, if you write an invoice for work completed for say $10,000, you could have approximately $8500 in available credit the day you issue the invoice.
When your customer makes their payment, this clears any amount you might have drawn up to $8500, and the balance comes through to you that day.
Increasingly, modern invoice finance providers are structuring their line of credit like an overdraft with a limit that is tied to the total of invoices outstanding at any time.
Capital Raise Against Equipment
Raising capital against equipment involves using existing business equipment as security for a loan. In this type of secured cash flow lending, the lender assesses the value of the business’s machinery or equipment and offers financing based on that value. This type of loan is useful for businesses that have valuable equipment but need liquidity to manage operations or pursue growth opportunities. It allows the business to leverage its assets without selling them.
Business Private Lending
Business private lending refers to loans provided by private lenders rather than traditional financial institutions. These loans are typically more flexible and can be tailored to meet the unique needs of the business. Business private lending is often used by companies that may not qualify for traditional bank loans or need quicker access to funds.
Advantages of Business Cash Flow Lending
Cash flow lending offers numerous benefits for businesses looking for financing solutions. Some of the key advantages include:
- Cover Cash Flow Gaps: If your business is experiencing a downturn, a cash flow loan is a simple and easy way to get funding for essential business needs.
- Get Funding Fast: Some cash flow solutions can be approved quickly, with some lenders offering same-day approvals and disbursements. This is ideal for businesses that need the funds urgently to cover expenses and maintain operations.
- Choose From a Variety of Options: From unsecured loans to overdrafts, there are plenty of options you can choose from as a business owner, allowing you to choose one that best suits your business needs.
Advantages of Cash Flow Statements
Cash flow statements can play an important role in managing cash flow within a business. These financial documents provide valuable insights into a business’s ability to generate and manage cash. Some key advantages of cash flow statements include:
- Operational Efficiency: They reveal how effectively a business converts sales into cash.
- Financial Health: Cash flow statements show the company’s ability to cover operational costs and debt obligations.
- Growth Potential: They indicate whether the business is generating enough cash to fund expansion.
- Risk Assessment: Can identify potential cash flow issues or seasonality trends.
For business owners seeking cash flow lending, maintaining accurate and up-to-date cash flow statements can be important so they can make decisions with confidence. These documents can significantly strengthen your understanding of your business’s cash flow cycle and overall management.
Cash Flow vs Asset Based Lending
It’s important to understand the difference between cash flow lending for businesses and asset-based lending. Both are forms of business financing. Since asset-based financing can raise funds for cash flow purposes, it can be said that it is a form of cash flow lending.
Raising capital against property or borrowing against the equity of your vehicles and equipment are some ways you can quickly access funding for your business.
Is Cash Flow Financing Right for Your Business?
Cash flow lending in Australia can be a powerful tool for businesses facing cash flow challenges. However, it’s essential to consider your business’s financial situation and ensure that you can meet the loan’s repayment terms before applying.
Here are the factors you need to look out for when considering commercial cash flow lending:
- An unsecured cash flow loan might be right for you if you don’t wish to tie up assets as security.
- An overdraft might be the right cash flow loan solution if you’re seeking support with day to day expenses or need a facility to cover seasonal differences in sales.
- An invoice finance line of credit might be the right cash flow solution if you’re a B2B business and your invoice terms are after you’ve provided your product or service.
To Sum it Up
Cash flow lending offers Australian businesses a practical and accessible financing option. With cash flow lending, businesses can access the funds they need to maintain operations, cover expenses, and invest in growth. Understanding cash flow lending can help business owners make informed decisions when seeking financing.
Get Cash Flow Lending for Your Business
We specialise in providing tailored cash flow lending solutions that meet the unique needs of Australian businesses. If you're looking to improve your business's cash flow or explore financing options, contact us today to learn more about how we can help you succeed.
