When you run a small business, a stop in your cash flow can threaten its very existence.
Even the smallest cash flow interruption can impact you. And this is where cash flow finance for small business ventures can make a difference.
How Can Cash Flow Finance Help Small Businesses?
What is Cash Flow Finance?
Cash flow finance is a way for small businesses to take out a short- to medium-term loan based on their expected cash flow.
There are several types of cash flow finance, but most lenders base their lending on your accounts outstanding as well as other working capital and assets.
Types of Cash Flow Finance
Here are the different types of cash flow finance options. However, you need to keep in mind that the best option for you will depend on your circumstances and the terms of finance that you are most comfortable with:
1. Business Credit Card
You can apply for a business credit card to help tide over this period of low cash flow.
This business credit card comes with the benefit of allowing multiple cardholders, collecting points, easy account management, and being accepted at a POS (point of sale).
However, these cards also have a higher interest rate has compared to other cash flow finance options.
2. Invoice Financing
This type of cash flow finance is also called invoice discounting or invoice factoring.
It frees up funds that your debtors owe your business.
Basically, your lender will buy off all your outstanding invoices and pay you about 80% to 85% of the total invoice amount.
Your debtor will then have to pay your lender the total amount of that invoice.
3. Line of Credit
A line of credit for small businesses is something like a business credit card.
The difference is that with a line of business credit, the amount of credit extended to you will be secured against one of your assets, usually a residential or commercial property.
This type of cash flow financing is similar to a line of credit.
An overdraft is a revolving loan where the interest payable is based on the outstanding balance at any time.
These are linked to your company’s bank account and are normally used to manage cash flow fluctuations.
5. Unsecured Business Loans
This is the most common type of cash flow financing option.
You do not need to give any security to take this loan.
It will be based on your company’s sales history and the loan terms will be set after you and your lender come to an agreement.
Are All Small Businesses Eligible for Cash Flow Financing?
Whether your business is eligible for cash flow financing will depend on the type of financing option you are looking at.
For example, it is extremely difficult to get an invoice financing option, as many lenders will require you to have at least $200,000 in annual turnover.
Or, if you are asking for an unsecured loan, your eligibility for this financing option will depend on your company’s ability to repay the loan based on your current as well as past sales.