Business Cash Flow Loans for Small Businesses

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Business cash flow loans have revolutionized the short-term small business lending marketplace. Merchant cash advances, ACH cash advances, purchase order financing, and invoice factoring have been around for decades, but growth took off after the 2008 Financial Crisis. That’s when large banks tightened their lending standards thereby excluding a large segment of small business operators.

Fortunately, alternative lenders in the Fintech industry saw an opportunity to provide small business owners with funding options they so desperately needed. Merchant cash advances and other business cash flow loans increased from an estimated $8.6 billion in 2014 to about $19.2 billion in 2019. Clearly, entrepreneurs are taking advantage of these new business funding sources.


What are Business Cash Flow Loans?

Technically, they aren’t business loans but cash advances. They are targeted towards small business owners who need short-term financing but have been denied funding from the traditional commercial lending industry. Borrowers who have poor to bad FICO scores, are in high-risk industries, have seasonal businesses, or have fluctuating project-based revenue streams are not automatically rejected by fintech commercial lenders. They tend to place more focus on the potential for small business success rather than on missteps in the past.



Business cash flow loans are short-term cash advances where the lender makes a claim on a percentage of future earnings. Repayment is deducted from daily or weekly sales until the advance is paid off. This process differs from asset-based financing where loan amounts are calculated based on company asset liquidation values and repayment is typically structured as a monthly fixed amount.


Asset-Based Lending vs. Business Cash Flow Loans

Traditional commercial lenders tend to rely on asset-based financing to reduce risk. This means that their lending practices tend to favor large, well-capitalized corporations rather than low-asset small businesses. While both business loan types rely on future earnings for repayment, the approval process is different.


Long-Term Asset-Based Business Loans

Well-capitalized companies approach the business loan process from a position of strength. Over the years, they’ve acquired assets such as accounts receivable, inventory, plant & equipment, and real estate. When approaching the bank for a commercial loan, they can leverage those assets as collateral. Because the loan amount is secured by collateral, interest rates are generally lower than unsecured business loans.

During the bank’s approval process, they’ll assess the extent of the corporation’s financial leverage through various debt-based ratios. This analysis ensures that the company has sufficient assets and equity to secure the loan. The company’s credit score will be evaluated as well.

Next, loan officers and corporate finance will determine which assets will be used for collateral. The ease of liquidation in case of default determines the maximum amount of the loan. Accounts receivable are the most liquid asset after cash with loan amounts equalling 75% – 90% of the face value of the invoices. Inventory, equipment, and real estate are much more difficult to convert into cash resulting in banks issuing loans at about 50% of their value.

Finally, the bank must assess the stated value of the company’s assets and determine if there are encumbrances on the pledged collateral. Bad debts will be deducted from accounts receivable, as will excess and obsolete inventory and aged machinery and equipment.

Small business owners applying for asset-based loans from traditional commercial lenders can face wait times of one to two months before knowing the success or failure of their application. Asset-based business loans are typically long term with repayment lasting from 5 to 25 years.


Short-term Business Cash Flow Loans

Business cash advances are generally used to address short-term cash flow problems. Companies with little to no physical assets, questionable credit scores, seasonal fluctuations, or have long cash conversion cycles such as project-based businesses, sometimes find themselves short of cash. Many of these companies find they are designated high risk by conventional lending sources.

Faced with insufficient cash, many small businesses risk failure if unable to meet employee payroll, pay key suppliers, or fund the next project. These short-term funding needs are increasingly denied by traditional business lenders leaving the fintech commercial loan industry to find financing solutions that help the small businessperson succeed.

Another feature of cash flow loans is that they are geared toward lower amounts that small business owners want to borrow. Harvard Business Review determined that 70 percent of small businesses want loans of under $250,000 with 60% wanting $100,000 or less. Big banks want to make large, long-term business loans.

One of the areas the financial technology (fintech) industry took was to streamline the loan application process. Small business loan applicants can fill in a short online form and upload three to six months of cash flow data and often know within a couple of hours if they’ve been pre-approved. In the time it takes to apply to one bank, owners can shop for the best terms from several online commercial lenders.

Rather than rely on business longevity and asset liquidation values, fintech lenders use financial algorithms based on machine learning, artificial intelligence, and predictive analysis to determine borrower risk.

Business cash flow loans generally use a factor rate rather than an interest rate. The cost of the loan can be converted into an Annual Percentage Rate for comparison purposes. APRs can range from double to triple digits. They’re suitable for short-term cash crunches rather than long-term financing.



Examples of Business Cash Flow Loans and How They Work

Invoice Cash Advances – These business cash advances, also known as invoice financing, are based on the value of your outstanding invoices. Fintech commercial lenders will issue a cash advance ranging from 75% to 90% of the face value of the invoices. When the owner is paid by the customer, the money is used to pay off the advance.

Purchase Order Cash Advances – These business cash advances help small business owners fill profitable contracts when they are short of funds to do so. A manufacturer may need to finance a large order or a contractor a new project, but they’re faced with slow-paying customers. Or retailers and wholesalers may have an opportunity to earn a substantial profit from an inventory turn-around that needs funding.   Purchase order loans can help business continuity as well as profit-making opportunities.

Merchant Cash Advances (MCA) – These cash flow loans are unsecured meaning that no assets need to be pledged as collateral. A personal guarantee by the borrower is sometimes required to secure the business loan in the event of default. Merchant cash advances can be beneficial to companies facing an emergency cash flow problem and that receive a high volume of credit card payments. Retail, hotel and motel, bars and nightclubs, restaurants, healthcare, and professional services are some businesses that could benefit from merchant cash advances.

MCAs generally use a factor rate for calculating the cost of the loan. For example, a $10,000 commercial cash advance may carry a factor rate of 25%. Therefore, the borrower will be required to pay back $10,000 x 1.25 = $12,500. A percentage of daily or weekly receipts plus the factor rate is deducted from credit card receipts to repay the advance.

ACH Business Cash Flow Loans – ACH commercial cash advances are similar to merchant cash advances. One difference is that they are based on the company’s cash flow from all sources based on bank statements rather than just credit card receipts. Lenders include cash deposits, checks, debit card transactions, and online payment services like PayPal as criteria for the business loan. Repayment is recouped by the lender through fixed daily or weekly automated deductions from the borrower’s bank account.


Advantages of Business Cash Flow Loans

Ease of Access – Loan approval rates can be as high as 90% for some commercial lenders. Cash advances are made available to business owners who have been refused financing by traditional banks including those with bad credit.

Speed – The process from loan application to access to funds can be accomplished in as little as a few days.

Solve a Problem – Not having cash to solve immediate problems can be frustrating for business owners. Meeting payroll, paying important suppliers, replacing revenue-generating equipment, meeting government regulations, and paying taxes are situations that can’t be deferred.

Take Advantage of Profitable Opportunities – Sometimes profitable opportunities arise that require an upfront investment. Business owners without sufficient investment capital often must pass up a chance to earn a quick return-on-investment.


Disadvantages of Business Cash Flow Loans

High Loan Costs – Most business cash advances are an expensive form of commercial financing.

Reduces Future Cash Flow – Daily or weekly deductions begin immediately which can put more strain on future cash flow.

Can Lead to Debt Dependency – Business cash flow loans are designed as short-term emergency financing options. Debt dependency can occur if it turns into long-term debt through repeat loan renewals.

May Cause Owners to Avoid Cash Flow Analysis – The ease for business owners to acquire commercial cash advances may allow them to avoid analyzing their business model for cash flow problems.


Resolving Future Cash Flow Problems

While short-term business cash flow loans solve an immediate problem, they’re an expensive commercial financing option. It’s important for entrepreneurs to analyze their business model to minimize or prevent future cash flow issues. For example:


  1. Slow-Paying Customers

Small businesses that issue invoices to their customers often have difficulty receiving timely payments. Large businesses in particular can delay payment for 60 to 90 days to their smaller brethren. Slow payments can prevent small businesses from purchasing inventory, funding new projects, or paying employees.


Possible Solution

Offer discounted terms for early payment. Terms like “2/10 Net 30” offers the customer a 2% discount if they pay in 10 days otherwise the full amount in 30 days. This works out to an annualized discount rate of 36.7%. If this rate is lower than your business loan APR, then its more profitable to offer the discount to improve cash flow rather than borrow.


  1. Season Fluctuations

Many small businesses have seasonal fluctuations that can cause cash flow problems. If you’re earning profit on an annualized basis then business model, cash flow, and expense management are areas to consider.


Possible Solutions

  • Find off-season opportunities to increase annual revenue streams.
  • Reduce on-hand inventory by returning or liquidating slow-moving inventory.
  • Save more cash from busy periods.
  • Analyze expenses for cost-reduction opportunities.


  1. Insufficient Project Capital

Not having enough funds to fill orders is one of the most frustrating situations for any business owner.


Possible Solutions

  • Ask for trade credit extensions from suppliers. This may result in slightly higher prices but is generally cheaper than business loans.
  • Build progress payments into large customer projects.
  • Offer customer payment discounts to increase cash flow.
  • Find business partners with excess cash to invest.


Business Cash Flow Loans – Should I, or Shouldn’t I?

Whether a business owner should apply for a business cash advance depends on the situation. For short-term profit-making opportunities its pretty straightforward. If there’s opportunity to earn a quick $50,000 profit and it costs $20,000 to finance it, then the owner stands to walk away with $30,000.

For companies that need to meet current business expenses like payroll, benefits are a little more difficult to assess monetarily. It’s important for employees to be paid on time for loyalty purposes, to ensure business continuity, and to maintain a company’s reputation in the community. If the choice is to finance current expenses, then it should be followed with a detailed financial and business model analysis to deal with underlying problems that threaten long-term business viability.

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