Cash flow lending is business funding assessed against the revenue a business brings in and its trading history, rather than against a property or a specific asset. Most business owners who arrive at this question already understand the basic idea, and what they actually need to work out is whether cash flow lending is the right fit, or whether invoice finance or a working capital loan would serve the business better.
This article sets out how the three options compare, the circumstances in which each one tends to work well, and what the application process looks like when it is handled through a broker.
Dark Horse Financial is a Credit Representative (No. 465 325) of Buyers Choice Licencing Pty Ltd (Australian Credit Licence No. 509484). We are not a lender. We arrange finance through a large panel of lenders spanning banks, non-banks and private financiers, and our role is to match a business with the lender whose policy suits its situation.
What Cash Flow Lending Is (In Brief)
In short, cash flow lending is funding approved on the strength of a business’s cash flow and trading history rather than on property, equipment or invoices held as security. It is typically unsecured or only lightly secured, and while it was once used mainly to bridge a short-term gap between money going out and money coming in, there are now evergreen cash flow lending products, including a number of strong non-bank overdraft facilities, that can fund ongoing operational expenses, with growing competition between lenders driving regular product development for business owners.
Because the lender is relying on the business’s ability to keep generating revenue, the assessment tends to focus on bank statements, turnover and the consistency of trading over time rather than on the value of an asset.
This is intentionally a short refresher. If you would like a fuller explanation of how cash flow finance in Australia works, including eligibility and how lenders assess applications, the topic is covered in more depth elsewhere on our site, and the rest of this article focuses on how it compares with the alternatives.
Cash Flow Lending vs Invoice Finance vs Working Capital Loan: A Side-by-Side Comparison
These three products are often confused, and that is understandable, because all three fund the day-to-day running of a business and none of them require property as security. The differences sit in what the lender assesses, how the facility is secured and how it is repaid, and those differences matter a great deal once the funding is in place.
Reading across each row, the key question is what the funding is relying on. Cash flow lending relies on the business’s revenue as a whole, invoice finance relies on specific invoices that customers have yet to pay, and a working capital loan relies on the broader financial position of the business and is generally set up for a need that has been planned in advance.
If speed and flexibility matter most and the requirement is short, cash flow lending is often the natural starting point. If, on the other hand, the business needs a more structured, planned facility with a defined repayment schedule rather than fast, revenue-based funding, a working capital loan is usually the better option to explore.
When Cash Flow Lending Is the Better Fit
Cash flow lending tends to suit businesses whose income is real and reliable over the year but does not arrive evenly from month to month. Signs it may be the right fit include:
- The funding need is $500,000 or less
- Revenue is strong overall but arrives in irregular or seasonal patterns
- The business does not hold significant property or hard assets to offer as security
- A short-term cash gap needs covering, for example between paying suppliers and receiving customer payments
- Speed matters more than locking in a long repayment term
These situations are common in B2B businesses such as transport operators, labour hire firms and manufacturers, which often bill on terms of 30 days from end of month or longer and still need to meet payroll, fuel and running costs every week while those payments are outstanding.
Where a business instead needs a larger, planned facility over a longer term, it is often better served by a more structured product, which is where the alternatives come in.
When Invoice Finance or a Working Capital Loan May Suit Better
Cash flow lending is not always the answer, and in two situations in particular one of the alternatives will usually do the job more efficiently.
The first is a business with a steady pipeline of unpaid B2B invoices. Here, invoice finance unlocks the cash tied up in those specific invoices, so the funding available grows with the business’s sales rather than being set as a single fixed amount. Consider a manufacturer supplying larger customers that insist on extended payment terms: the work has been done and invoiced, the revenue is effectively secured, and the only problem is waiting for it to arrive, which is exactly the gap invoice finance is designed to close.
The second is a business that knows its funding need well ahead of time and would prefer a structured facility with scheduled repayments. A working capital loan suits this kind of planned requirement. For example, a wholesaler that buys a large volume of stock each year ahead of its busiest season can see the purchase coming months in advance, and a facility with a defined term and repayment schedule allows that cost to be spread across the trading period that follows rather than met from cash on hand.
In both cases the deciding factor is the same as it is for cash flow lending, namely how and when the business’s income arrives and how long the funding is genuinely needed for.
How the Application and Assessment Process Works
Working through a broker changes the shape of the process. Rather than being measured against one lender’s criteria, the business’s situation is assessed first and then matched to the lender on our panel whose policy is the right fit, which avoids applications being lodged with lenders that were never likely to approve them.
The process generally follows five steps:
- Initial discussion of the business’s cash flow position, funding need and timeframe
- Matching the business with a suitable lender on the panel based on that assessment
- Submission to the lender, along with a read-only view of the business’s bank account statements
- Lender review and formal offer, often within 24 hours
- Funds released once terms are accepted
How long each stage takes depends on the lender, the product and how quickly the business can provide its documentation, so it is worth having recent bank statements and basic trading information ready before the first conversation. Having that information on hand from the start tends to make the whole process run more smoothly.
Real-World Example: Cash Flow Lending in Practice
A common use of cash flow lending is protecting a business’s working capital through a seasonal slowdown. In one recent example, a construction company approached us ahead of the Christmas shutdown with a substantial payroll to cover, and with the concern that if some of its customers went into the break without paying their invoices, the business would be short of cash and would struggle to remobilise its crew at the end of January.
Building and trades are treated as a restricted industry by many lenders, which often cap construction businesses as a general rule regardless of how well they are run, so choosing the right lender was the most important step. The business was matched with a non-bank lender, operating on its own funding lines, that provided a $200,000 unsecured line of credit with no establishment fees, no line fees and no ongoing monthly fees, giving it a back-up facility large enough to see it through the break without a heavy fee burden.
You can read a cash flow lending case study for the full details of this example.
Conclusion and Next Steps
Cash flow lending, invoice finance and a working capital loan all fund the day-to-day operations of a business, but they suit different situations. The right choice depends largely on how the business’s income arrives, what security it can offer and how long the funding is needed for.
If you are weighing up these options and would like guidance on which one fits your business, speak with a Dark Horse broker who can assess your position and match you with a suitable lender from our panel.
FAQs
Cash flow lending is typically unsecured, as the lender is relying on the cash flow and trading history of the business rather than on a specific asset, although lenders will ask for a director’s guarantee, and any other requirements come down to the lender and how large the facility is.
The two overlap, but a working capital loan is typically the more structured and planned facility of the two, with scheduled repayments over an agreed term, whereas cash flow lending is generally used over a shorter period to cover a temporary gap and is assessed mainly on revenue and trading history.
Invoice finance is tied specifically to unpaid invoices, while cash flow lending is assessed against the business’s overall trading history. In practice that means the funds available under invoice finance move up and down with the invoice ledger, where a cash flow loan is usually a set amount worked out from the business’s revenue.
Cash flow lending is generally used to cover short-term operating gaps such as payroll, supplier payments or stock, and it suits businesses that are trading soundly but are managing the gap between paying their own costs and waiting on customers to pay them.
Some lenders can assess, approve and fund within the same day, although timeframes vary by lender and by how quickly the business can supply its documentation. An application that comes with clear, up-to-date bank statements and trading information will generally move through assessment faster than one where the lender has to go back and ask for more.
Sources and Methodology
This article draws on Dark Horse Financial’s experience arranging business finance for Australian businesses across a large panel of lenders. It does not quote rates, fees or approval timeframes, as these vary by lender, product and the circumstances of each business, and any figures should be confirmed with a broker at the time of application.
Disclaimer
This article is general information only and does not take into account your objectives, financial situation or needs. You should consider whether the information is appropriate for your circumstances and seek professional advice before making any financial decision. Dark Horse Financial Pty Ltd is a Credit Representative No. 465 325 of Buyers Choice Licencing Pty Ltd.
