Cash Flow Loan
Ben Larkins and John Maloney talk us through cash flow loans.
What is a cash flow loan and how does it work?
It’s a loan to a business usually over a short period of time to assist with a cash flow shortfall. It might be to cover payments on invoices – for example, if a customer has gone bust, leaving you with a cash flow shortfall.
What are the eligibility criteria for obtaining a cash flow loan?
The business needs to have been trading for over 12 months and have financials that evidence they can afford to pay back the amount they want to borrow, over the agreed period of time.
A cash flow loan is short term, so the monthly payments are going to be higher. Affordability is a big thing because you will need to repay the loan amount within six to 12 months. Serviceability plays a big part.
One thing we see quite often is clients asking for a cash flow loan over five years. But by its nature, a cash flow issue is – hopefully – a temporary thing. So if you’re expecting a cash flow issue that lasts five years, there’s potentially something wrong. Cash flow is short term: six to 18 months. This is a product for a short term problem.
What are the typical interest rates associated with cash flow loans?
It’s very much risk dependent. If you’re a long-established business with good credit terms, good personal credit and it’s just a little blip – perhaps just one overdue invoice – you will get a lower rate.
If you’ve been trading for two years and you have a chequered past on your credit file, the rate is obviously going to be higher. There will be more risks associated with the funder for that.
What are the repayment terms and options for cash flow loans?
Usually the request for a cash flow loan is between six and 12 months. If you’re looking for anything longer than 12 months, you’ve potentially factored in the wrong things in your cash flow – or you’re not actually looking for a cash flow loan.
This is quite common. People come to us for a cash flow loan but when they start explaining, they have a different need. Often, the money is for a specific purpose or a project, so they actually need a conventional business loan.
We’re here to help educate customers – it’s easy to put ‘business loan’ into Google and a sponsored page will come up with a cash flow loan. They assume that’s what they need – but often their requirement is more complex.
What are the advantages of a cash flow loan compared to other types of financing?
Speed – by the nature of the product itself, people need a swift resolution to cash flow problems. So it’s no good making an application and waiting for two weeks to hear back – the problem will either have grown to a size that’s not fixable, or it’s been fixed. So, speed is the advantage.
What are the potential risks or disadvantages of taking out a cash flow loan?
The term is probably a disadvantage – because it’s over a short term, your monthly payments are higher. That can make affordability and serviceability more challenging. The higher monthly payment can put more potential stress on the cash flow of the business.
How can a cash flow loan help businesses manage their finances and improve cash flow?
It obviously gives them an immediate injection of cash, to help pay bills – be that for materials, stock, staff, tax bills or PAYE bills. That swift influx of cash could perhaps take a bit of pressure off the business owner.
We’re all business owners. We all have to watch cash flow. Everybody’s in the same boat and has to look at how they will afford to pay for this, that or the other.
What documentation is typically required when applying for a cash flow loan?
Usually we’d need the last year end accounts and the last six months’ business bank statements. Sometimes with a cash flow loan, the funder will want evidence of the pinch point – that might be an unpaid invoice or, if you’re looking for stock, you might have an invoice from a wholesaler, an importer or exporter.
A couple of funders we work with make automated decisions – they don’t actually need any financial information until they do their due diligence at the end. That’s when they’ll need bank statements, ID and things. So you might get an immediate, auto decision up to around £25,000.
Are there different types of cash flow loans available? How do they differ?
People do get caught up in products with fancy names when in reality they’re all kind of the same thing. With cash flow loans, some lenders might lend you £10,000 at a fixed monthly payment over 12 months – and if you pay it back after three months you’re still paying the full amount of interest.
Others will calculate the interest on a monthly or weekly basis, and if you want to settle it early that interest is only charged up to the point of settlement. That’s really the only way they differ.
Can individuals apply for cash flow loans, or only businesses?
With us, only businesses. I’m sure there are people out there who do cash flow loans for personal individuals, but we don’t.
Are there any industry specific considerations or requirements when applying for a cash flow loan?
No, not especially. It’s pretty standard across the board. If you’re coming to us for a specific cash flow need, it’s probably something that businesses of all types have experienced in their time.
There aren’t really industry-specific considerations. Perhaps if you’re a professional, you might be looking to fund your insurance or a licence for the year – but for these things you’re probably not wanting a cash flow loan – an unsecured business loan will probably be more suitable. For a generic cash flow loan what we require is fairly consistent.
How long does the application process for a cash loan typically take?
No longer than two days. Cash flow loans are a pretty urgent need, so we try and get them done within 48 hours. We certainly wouldn’t go any longer than a week. In some circumstances we can turn them around the same day.
It can be anywhere between four hours to three days from application to receiving the money.
What are some common reasons why cash flow loan applications may be rejected?
It might be that somebody has applied too late. Maybe they’ve delayed coming to us and the direct debits or the bills they need the loan for have been called in. They may now have a County Court Judgement (CCJ) or a few bounced payments on their bank statements.
As a business owner you can usually see things coming. If you have a big client that goes bust, that you were expecting to pay an invoice tomorrow, then obviously that’s an instant thing – but nine times out of 10 you can see it coming down the line. We’re trying to cure the problem rather than prevent it.
Can a cash flow loan be used for purposes other than funding a business?
No, not with us.
Can a cash flow loan be used to refinance existing debt or consolidate other loans?
No, again, not with us. The nature of a cash flow loan is that it’s a short term thing. We would steer someone in this situation towards an unsecured business loan over a longer term, or if the consolidation requirement is greater than that, we would talk to them about a secured finance facility.
How can businesses determine the appropriate loan amount for their cash flow needs?
Talk to your accountant, or if you use accounting software you can access cash flow forecasts. It’s not really what we do.
We would like to think that when somebody approaches us for a loan of any description, be that for cash flow or a product purchase, they’ve done their homework. They know that they can afford it. They feel confident in making the monthly repayments.
We wouldn’t get involved with deciding how much money is needed. If somebody phones us wanting a cash flow loan to consolidate debt, we’d certainly steer them away from that because it’s not the right product for them. But in terms of the loan amount, most businesses know how much they need.
Is it possible to secure a cash flow loan if the business has a poor credit history?
It depends on how poor the history is. If there are a few missed payments on the credit file then we can probably do it. If the business has multiple CCJs and the director has poor personal credit with defaults and missed payments, then probably not.
But I would always say, come to us and put in your application. We’ll have a look at it and try to the best of our ability to facilitate a loan for you. If the problem is too far gone and the credit files are not too good, it’s probably not going to be a positive outcome.
With a poor credit history comes bigger risk for a bank, which means higher interest rates – so that’s something to consider as well. In layman’s terms, if you haven’t paid the other five loans you’ve had, why is this one going to be any different?
Are there any specific steps businesses should take to maintain a positive cash flow when using a cash flow loan?
That’s probably a question for your accountant. If you have regular meetings with your accountant and your accounting software is up to date, you should have a good handle on it.
It’s not really for us to comment on a business’ cash flow and how to stay on top of the invoices. Speak to an independent financial advisor or accountant for that one.
Are there any alternatives to cash flow loans that businesses should consider?
The alternatives are unsecured business loans, secured business loans or asset finance. It’s all about what you need it for.
If you’re looking for short term help, cash flow loans are often the best option. If you’re looking for something slightly longer term, an unsecured or secured business loan would be better.
If you’re looking to purchase something for your business then probably asset finance would work for you. There are lots of alternatives out there – if you’ve spoken to your financial advisors and accountants and you’ve identified a problem, come to us and we’ll recommend the product that we think is the most appropriate for you.
Are there any tax implications associated with cash flow loans?
Again, this is one for your accountant. With my limited knowledge, I believe you can offset the interest payments against tax. But don’t quote me – speak to your accountant.
Is it possible to pay off a cash flow loan early without incurring penalties or additional fees?
It depends on the funder’s policy. A lot of our funders do have policies where if you pay it off, there’s no future interest. There’s interest up to the point of settlement.
Other funders may give you a 20% discount on any additional interest. So it really is funder dependent. Depending on which funder is approved by our account managers, we will let you know before any drawdown what the settlement procedure is.
Do cash flow loans require collateral or personal guarantees?
Cash flow loans do not have any charge on property or business assets. But yes, they do require a personal guarantee.
What impact does the current economic climate have on the availability of cash flow loans?
[podcast recorded in September 2023]
We’re going political now. This is really about uncertainty. Do you act now and things potentially get worse or do you not act? It’s very difficult.
But in terms of availability, there’s a wide range of lenders offering a cash flow loan product. So access to credit at the moment is good.
What advice would you give to businesses considering applying for a cash flow loan?
Don’t leave it too late. Make sure you’ve spoken to the relevant people – your accountants, maybe a financial advisor, or a business coach that you’re working with.
Get the relevant information in before applying for a cash flow loan. Just be aware that because it’s a cash flow loan, it will be short term. Don’t try to apply for a cash flow loan over four or five years – it’s got to be six, 12 or 18 months.
The need for financing
There are so many instances in which a business needs financing. Even the most experienced entrepreneurs and business leaders will find that cash flow can be a problem. It’s also a fallacy that cash flow problems only affect smaller or newer businesses because the most time-served and asset-rich firms can still experience these issues.
Why is cash flow so important?
A going concern
Cash flow keeps a business ticking over. Even a profitable business cannot stay in operation if it struggles with cash flow.
To secure finance
Cash flow allows businesses to secure finance when they need it. If a firm has insufficient cash flow, it can secure a business loan against its assets. This can then continue to flourish by using that cash flow to operate successfully. A good way to improve business cash flow is by using a business cash flow credit facility and then managing it carefully.
To attract investors
Operating cash flow is one of the key measures that investors look at in evaluating any business. Investors will look at net income and revenue too, using the three measures to identify how well a business is able to sustain revenue and to grow in the future. Remember that even a highly profitable business can fail if its cash flow is insufficient.
To manage the business proactively
When a business has cash in the bank it has opportunities to move ahead. For example, it may want to buy in external expertise, to invest in R&D, to launch a marketing campaign, to upgrade its software, to train staff and so forth. By having that essential cash, the business can move quickly to capitalise on such opportunities.
Good cash flow can support a healthy business If a business can keep a healthy cash flow, it can plan ahead for its future expenses and income and then flag up any possible problems. This forward-thinking helps to maximise profitability by allowing business leaders to put longer-term plans in place.
Good cash flow maintains a great reputation A business with healthy cash flow can pay its suppliers on time, pay staff on time and meet its financial obligations. This helps it to maintain a positive reputation which is essential in today’s challenging business environment.
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