Business Loans for Cash Flow
Cash flow management is a skill that every small business owner will need to master to succeed. Cash flow is the flow of money in and out of your business. It consists of revenues coming in and expenses going out.
One of the first cash flow management problems businesses struggle with is lopsided cash flow. More money is going out than is coming in. This is why so many startups end up borrowing cash to find their operations while they get off the ground.
More established businesses struggle with a different type of cash flow problem, when cash inflows and outflows do not align. Your business generates enough revenues to cover your expenses, but bills come due while you are waiting to be paid.
In seeking to solve these problems, you have probably realized that you need access to credit to smooth over cash flow bumps. Shield Funding helps secure many types of business loans and credit products for existing business owners and the process is fast and easy. To get started apply online in minutes. Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What Do I Need to Qualify?
Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What are Cash Flow Business Loans
Funding for cash flow purposes must, above all, be liquid. This means that funds that are difficult to access or require long waiting periods to get approved, and have withdrawal limits, will not serve your purpose.
Savings accounts limit you to six withdrawals per month or you start paying fees. Traditional bank loans take months for approval and, once you’ve used the money or repaid it, you don’t have access to that capital again. A business loan for cash flow should have the following characteristics:
- Easily accessible, through checks or debit cards
- No monthly limits on withdrawals
- Funds continue to be accessible after repaid
Funding specific to cash flow management should be accessible; after all, you are using this capital to pay expenses that are not always predictable. Many of the best business loans for cash flow have checks or debit cards that you can use to pay a vendor but which access the capital.
If you are limited to a certain number of withdrawals per period, typically a month, you will not have the flexibility that you need. You also do not want to be charged additional fees to use the capital you have obtained.
A traditional term loan does not free up money when you make a repayment. If you needed more money, you would have to apply for another loan. Business lines of credit and options we will discuss below make that money available again for you to use over and over.
Whatever capital tool you select to manage your cash flow, make sure that it meets these criteria.
Can I Get a Business Loan for Cash Flow From a Bank?
Banks do extend business lines of credit to qualified customers. They prefer to lend to businesses which already have a banking relationship with them, which means that they can access your records and more easily verify your credit-worthiness.
Typically, you need to meet the following to qualify for a bank’s line of credit;
- A credit score above 650.
- Been in business longer than two years.
- Strong monthly and annual cash flows.
Those are the minimum qualifications, but they could also request more documentation. While you may be able to qualify for a line of credit with a bank, by the time the approval process is completed your cash flow situation could have become dire. Alternative lenders also offer lines of credit at competitive rates, but for far less hassle.
Types of Business Loans For Cash Flow
Business loans for cash flow purposes are rarely fixed-rate, term loans, but alternative forms of capital. That is because you will need quicker approval times and more flexible terms for capital designed for cash flow management than a term loan.
Business Lines of Credit
One of the most popular cash flow management tools is a business line of credit or LOC. Similar to a credit card, the line remains open and the capital ready to access when needed. It has a limit, also like a credit card, and can remain open for one or more years. What is often the case, whether it is year one or year five, the line of credit freezes and converts to a term loan.
An advantage to an LOC is that a payment is only required, and you only pay interest, if you draw on the line. Be aware that some lenders charge annual fees to keep it open if you are not using it. This is because the capital sits ready for you to use and they cannot lend it someone else. Lenders might also charge a draw fee every time you take out a withdrawal.
Lenders require more documentation when applying for a LOC, unless you go with an alternative lender, but because they do more due diligence you will pay a lower interest rate. That is one of the biggest pluses to a LOC versus a credit card.
While approval times and limits vary, they can take as little as a few days. Your credit score and banking history will be considered but may just lead to a higher interest rate or lower limit than being denied for credit.
Bad Credit Business Funding
Alternative lenders take more risks than traditional lenders, and can afford to do so because of the rates they charge and their years of experience. Products meant for those with bad credit can also be a good choice for those who need help managing cash flow because they have quick turnaround times and easy approval processes.
A bad credit small business loan can make it through underwriting be approved in just 24 hours. The loan’s funds could be in your bank account or usable within a few days. This makes them an excellent choice if you have a last minute cash flow emergency and are now rushing to find funding.
The decision to lend is based on your business’ annual revenues and how long you have been in business, which can be as little as two months. Business owners with credit scores above 500 and whose businesses generate $8,000 of monthly revenues will find it easy to qualify.
Alternative lenders fund business lines of credit or business loans in amounts between $5,000 to $1 million. They are unlikely to request tax returns or bank statements unless you are borrowing near the upper limit. Bad credit business lines of credit require much less documentation than a LOC through a traditional lender.
Alternative lenders do charge higher interest rates on their lines of credit to cover their risk. Your interest rate on a bad credit business line of credit will range from 12% to 45%. If you have a decent credit score, the interest rate could be comparable or less than a business credit card or merchant cash advance.
Alternative lenders are an accessible funding source for business owners trying to use capital to manage their cash flow.
Business Credit Cards
Credit cards are another cash flow management tool, one used by many small business owners. Approval is typically quite fast, and you can apply online in minutes. Many business credit cards offer the ability to earn perks such as miles on airlines or cash back.
Like a line of credit, when you pay off some of what you owe on a business credit card you can use that capital again, if need. But unlike a line of credit, they charge extremely high interest rates. The lowest quoted rate for a business credit starts around 14.49% and can go all the way up to 26.99%. Unless you have excellent credit your interest rate will be at the higher end, and is likely to be more than the rate you would get on a bad credit line of credit.
You could wind up paying even more than this rate, as many credit card companies raise your rate if you miss a payment or make a late payment. It is also not uncommon for them to charge an annual fee, and you have no control over when the company will raise it.
And unfortunately, small business owners with credit scores below 690 might not be approved for a business credit card. When deciding whether or not to open a business credit card, keep in mind that the credit limit you are given might not be high enough to satisfy your business need. Also, if you immediately max it out, it will further hurt your credit score.
Fast Business Loans from Alternative Lenders
A fast business loan has a term of no longer than two years. For business owners who dislike variable monthly payments, it will be a fixed-rate loan. The payment will not vary and you will be able to budget repayment for the future. Alternative lenders who offer fast loans lend smaller amounts of capital to hedge their risk, but it could be all that you need.
Alternative lenders also lend for shorter periods of time to lessen their risk of non-payment, which again could suit your business needs. But a shorter repayment period also leads to a higher monthly payment. For example, a $12,000 loan repaid over six years has monthly payments of $167, but repaid over three years the payment jumps to $333.
Before you apply for any kind of working capital loans bad credit, calculate your free cash flow and check your budget to make sure that you can make payments. Lenders who offer fast loans also make repaying them easy. You can set up monthly, bi-weekly, weekly, or even daily payments to automatically deduct from your bank account.
Merchant Cash Advances
A merchant cash advance or MCA is another option for a business loan for cash flow. It’s particularly helpful if your sales tend to fluctuate and you know you can repay the loan quickly. That is because a MCA is borrowing against your future sales.
To figure out how much they will give you, the lender will ask to see credit card or bank statements from which they will calculate average cash inflow. All that concerns them is that you have money coming into the business, so qualifying for a MCA can be easy and quick.
For a business which struggles with cash flow, this could be a great option as you don’t repay the advance until money is coming into the business. However, MCA’s are repaid when the lender takes a percentage of each sale. That percentage includes principal repayment and their profit.
The interest rates on a MCA start at 15% and can rise up to triple digits. Many lenders have language in their agreement that allows them to continue to raise the rate if it is taking too long for them to be repaid. A fast loan, business credit card, or bad credit business loan could all have a much lower cost of capital.
As well, qualifying for a merchant cash advance will depend upon regular credit card sales. If your business is having a cash flow problem, it is highly unlikely that you are swiping enough sales to make a MCA a good option for you.
Invoice Factoring and Financing
While you may be great at selling, you may not be great at collecting. A successful business is often built on relationships, which is why many business owners struggle with being firm and collecting from customers who often feel like friends. If a large balance of past due invoices is causing your cash flow problem, look into invoice factoring and financing.
With a MCA you borrow against future receivables, with invoice financing you borrow against, or sell, your past due receivables. With invoice financing lenders the balance of your past due receivables is pledged to them. They will not give you 100% of the invoices face value, instead they hold back a reserve from advanced funds to protect them from customers who will never pay. The amount they advance after this reserve could be 80-85% of the total invoices, or much lower.
An invoice factoring company buys the invoices at a discount and collects directly from your customers. But if your customer’s have poor credit, you could receive much less than the invoice’s total amounts. You could be giving away a significant amount of your cash flow just to smooth over a temporary cash flow issue.
How to Find the Best Business Loan for Cash Flow
Compare all the lending options available to you against your business’ situation. This will often point you in the right direction of where to borrow. If you have difficulty collecting on past due invoices, look at invoice factoring. Just need to draw on capital now and then? A bad credit business line of credit could solve your worries.
Always ask about fees, prepayment penalties, and possible interest rate increases. A reputable lender will happily answer all your questions, as they want the experience to be successful for all the parties involved. The answers you find will help you compare lenders. If Lender A charges no prepayment penalties, and allows you to be late paying up to three times a month, they could be a better option than Lender B who does charge prepayment penalties and massive late fees.
Ask the lender if they can give you the loan’s APR, or annual percentage rate. This rate, unlike a simple interest rate, blends together both the interest and fees to more accurately present your cost of capital. While two lenders may quote you the same rate, the APR may make it obvious that one is a better choice.
A lender charges a prepayment penalty if you pay off the loan early, to make up for their lost profit. If you plan on paying off your loan early, do not borrow from a lender who charges this penalty. Shield Funding does not charge prepayment penalties, and after ten years in business we know how to help businesses that need cash flow help.
The Final Word on Business Loans for Cash Flow
Not all lending products are created equal, or will fulfill your needs, just like not all businesses who struggle with cash flow do so for the same reason. An experienced lender will analyze where you are having problems and can help you decide between products. Call Shield Funding today to find out more about your options when borrowing for cash flow management.