It’s important for small businesses to have cash flow at appropriate times when growth opportunities come up, like a bid for a new contract or business acquisition. Likewise, cash flow is necessary to be able to make supplier payments early in order to get better margins (i.e. some suppliers will offer discounts/reductions if you repay early), or to meet the deadline for your employees wages.
But typically around 50% of small businesses in Australia are struggling with positive cash flow and indicate that this is a key barrier to their business growth. Many small businesses are also reliant on their own personal finances, such as high interest credit cards, to cope with cash flow issues and manage working capital.
One solution to obtain short-term business finance is cash flow lending, which is an alternative loan to more traditional methods of lending, and which tends to be faster and more flexible.
What is cash flow lending?
Cash flow lending is when a company borrows money from a financial institution or lender against expected revenues they anticipate they will receive in the future. It provides a flexible facility to release cash into the business to meet timing differences in payments and receipts.
Cash flow lending can be broken up into two tiers within the market:
- Less than $250k – usually short term loans which require no property security. Lenders examine the guarantee of directors/shareholders, expected future company incomes, credit rating and enterprise value. Can be loaned on a 6, 12 or 24 month plan with application and access to funds processed within 48 hours. Fixed weekly/fortnightly repayment.
- More than $250k – usually for invoice/debtor finance, suitable for SMEs with a turnover of +$2million, suitable for growth, seasonal or cyclical scenarios, charge over book debts (accounts receivable) and guarantee from shareholders/directors.
Cash flow lending is usually not financed by traditional lenders, such as banks, as they prefer property-backed funding. It is usually financed by Fintechs, however, for bigger amounts of more than $250k, finance options from mainstream lenders have recently become available.
How is cash flow lending different to traditional business financing?
Cash flow lending is secured against business income, credit rating and value rather than property security (including reasonable amounts of equity in the property).
It is short-term compared to business loans which are usually subject to monthly repayments over 5 years. Short term cash flow lending may have entry or exit costs in addition to prepayment charges and weekly or fortnightly repayment terms.
It offers greater flexibility and avoids the use of overdrafts, which banks are reluctant to provide without security. The time to set up a cash flow loan is also much quicker than applying for a traditional business loan, and a small business can expect to be funded as quickly as 48 hours.
Implications for businesses
Here are some considerations to help you weigh up if cash flow lending is right for your business:
- Easier to arrange, brokers can help control most parts of the process
- Can obtain business financing faster as an appraisal of collateral is not required
- More flexibility as you don’t need complete financials that banks usually require
- Unsecured (not property backed) usually means substantially higher costs (i.e. interest rates etc)
- Based more on income and payables and receivables ledger. However, accounts receivable needs to be sourced against eligible receivables, therefore this does not work for B2C businesses
- Not a cure for poor business decisions or a solution for clients who are involved with poorly run or risky businesses
While cash flow lending isn’t a long-term fix, it can be ideal for small business growth, acquisitions, seasonal and cyclical processes (i.e. payroll). It is also ideal for businesses where there are multiple owners and where money can be raised and secured against the business.
Fintechs have largely replaced the banks in the cash flow lending market, however, as they are still quite a new entity it is worth approaching a broker to help you assess all the unsecured business financing options available, and navigate which lender is most suitable for your cash flow requirements.