Ever wanted to find out more about cash flow loans? How they work and how to get one?
You’ve come to the right place.
In this episode of the Century Business Finance Hub, John and Ben delve into cash flow loans in their entirety, to equip you with the knowledge that will allow you to make an informed decision on whether cash flow loans are the most suitable financial solution for your needs.
So what exactly is a cash flow loan?
A cash flow loan is a short-term financial solution to a problem, whether a customer hasn’t paid you, you are on 30, 60, 90 day invoice terms and they’ve gone a little bit over and you need a short term solution or maybe you’re a bit short to pay your staff in the month. Cash flow loans are ideal to cover the everyday things that crop up in a business, when you need to bridge a gap.
Cash flow loans are usually taken over between three and 18 months maximum.
When might I need a cash flow loan?
When it comes to VAT and tax, there are different products available that you can use and there are particular funders that offer three to six month VAT and tax bill funding.
However, it is recommended that a cash flow loan is taken over a period of three to six months, when you’re approaching your busy period. For example, if you own a convenience store and Christmas is coming up, you may want to invest in more stock. This is because after three to six months, the money will start to come in. A cash flow loan is ideal as a short term funding solution that gets you from A to B.
There may be a misconception surrounding cash flow loans that they are a weird and wonderful product created by a creative banker. But essentially, it’s just an unsecured business loan over a short term, to help you out of your short term problem.
A cash flow loan is not necessarily the product itself, it’s more about the use of what you want the loan for.
How can a cash flow loan help me?
In short… A cash flow loan can provide a short term solution to a short term problem. By utilising a cash flow loan, you can avoid other expensive avenues of credit such as a highly expensive credit card or a prepaid mastercard with extortionate interest rates.
A cash flow loan is a way to achieve what you want to achieve without putting that stress on the business.
In this episode, John talks about naturally wanting to avoid taking out a loan if you don’t need it. But at the same time, you want to be as best prepared as you can in the event that a problem occurs.
John says: “You want to anticipate a problem before it occurs. You don’t want to leave it until you’re bouncing all the payments, where it will be visible on your bank statements.”
Ben adds: “If you someone hasn’t paid you on Monday and payday is on Friday, you run the risk of your staff not getting paid.
“You don’t want to leave it until Wednesday to decide what you’re going to do in that situation – it should’ve been sorted on Monday.”
John and Ben also go on to explain how being hopeful and optimistic about someone paying you when you need it the most, isn’t going to provide you with a solution. You will just be kidding yourself.
Will a cash flow loan be cheaper than alternative options?
John explains that, “nine times out of ten there will be a higher interest rate as it’s a form of short term borrowing, whether you’re borrowing for cash flow, equipment or a provision loan for a property – short term borrowing is expensive, more expensive than long term borrowing.”
The reason being if it’s short term – it’s usually quicker to obtain. If it’s quick to get, there is a reason why you need it quickly. As a result, the lender is going to want some sort of return. But that’s not to say they aren’t good products, as they are.
With a loan, there is an end in sight. You have the loan over a period of time, you will know exactly when your payments will be due and for how much. In comparison to a credit card where you may only have to make a minimum payment of £10 a month, then you’ll always owe the amount you originally borrowed.
John and Ben would highly recommend a cash flow loan over any other short term form of borrowing, as they explain how you will just be putting yourself in further trouble with credit cards or a prepaid mastercard.
What security do lenders want?
When it comes to unsecured loans, there is zero security in terms of there’s not a debenture on your company or a charge on your property/over assets, or you won’t have to refinance assets – there is however, a personal guarantee.
Unsecured loans are unsecured but, you will have to personally guarantee it as a director or a business owner, which won’t go on your credit file. Which means, if you’re a homeowner, it won’t prevent you from selling your home, moving house or buying property.
An example scenario where a cash flow loan has helped a client
John and Ben are currently working with a client who needs a cash flow loan of £20k as he’s just taken on a new contract and the new contract will take a few months to take effect when he starts invoicing out. So he needs the money to allow him to continue trading for the next two months.
It’s not a business rescue scenario, it is a scenario whereby he will be invoicing out a few hundred thousand pounds once this contract comes in, when the invoicing kicks in within the next couple of months. But he requires the £20k to service his usual bills like his rent and to pay his staff.
Cash flow loans are not necessarily required in an emergency, in this scenario it is a case of someone needing it to service the contract.
If you have any questions regarding cash flow loans, have a look at the Century Business Finance website. Alternatively, you can email or call John or Ben and put your question straight to them.