How does a cash flow loan differ from a traditional bank loan?
Traditional bank loans require certain lending criteria that are more stringent than for a cash flow loan. These include checking the potential borrower’s profit and loss, and cash flow statements. A new business might be required to provide a business plan as well. In many cases, a bank business loan will require some form of collateral, including residential or commercial property. The process for getting a traditional bank loan can take from weeks to several months. The long timeframe makes this type of business loan unsuitable when the funds are needed quickly.
With cash flow lending, the lender uses different lending criteria. This can include checking recent bank statements to determine if the borrower will be able to make the payments. Online cash flow lenders use leading-edge technology to determine the creditworthiness of a potential borrower. So there’s no requirement to submit large amounts of paperwork such as a business plan and financial statements.
Unlike with banks, this background research is conducted quickly – most cash flow lenders can make a decision on granting a loan within 24 hours and transfer funds immediately upon loan approval. Given the quick timeframe for getting a cash flow loan, it’s preferable when money is needed in a hurry. Another attribute of these loans is that they unsecured, meaning they don’t require collateral.
Typical uses for a cash flow loan
Given the speed and ease of getting a cash flow loan, it’s easy to see why they becoming increasingly popular among small businesses. So what can this loan be used for? It could help you:
- Get working capital to pay suppliers while waiting for payments from customers
- Buy discounted inventory available for a limited time
- Hire new staff to meet the needs of your growing business
- Buy stock to meet seasonal demand, such as before the Christmas shopping season
- Initiate an online marketing campaign to grow your business.
Note that this type of loan is not used to make large purchases, such as commercial property.
Points to keep in mind about cash flow lending
Because cash flow loans are not secured, there’s more risk for the lender. Higher risk means a higher interest rate. Although the interest rate will be higher, these are short-term loans (six months to 24 months), so the overall amount of interest paid can be less than with a long-term traditional bank loan.
Although a cash flow loan is not secured with collateral, your assets will be at risk if you are not able to make the payments on the loan.
Do you meet the criteria for a cash flow loan?
You will need to ask yourself a few questions about cash flow lending:
- Do you need money fast, have a short-term opportunity, or want to implement any of the items mentioned above?
- Do you have an opportunity that will enable you to repay the loan and generate a return on investment?
- Do you lack collateral for a traditional business loan?
If you answered ‘yes’ to these questions, a cash flow loan could be right for you. You can learn more from What Is Cash Flow Finance?
Find out more about short-term unsecured business loans from Moula to improve your cash flow. Also, check out our business loan calculator for an estimate of business loan principal and loan repayments.