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The Pros and Cons of Cash Flow Funding
June 11, 2021
The Pros and Cons of Cash Flow Funding

The Pros and Cons of Cash Flow Funding

If your small business can prove steady growth of cash inflows that require an upfront investment to produce more revenue, cash flow funding may be ideal.

Also known as cash flow financing, cash flow funding may be just what you need to take your business venture to new heights.

In this blog post, we’ll review what cash flow funding is as well as its pros and cons so you can decide if it’s right for your business. 

What is Cash Flow Funding?

With cash flow funding, you can receive the money you need without putting down collateral like your property or inventory to secure the loan.

It’s usually far easier to get approved for cash flow financing than traditional loans from a bank. If you own a newer business that’s focused on growth, or don’t have the best credit score, it may help you meet your goals

In most cases, the business financing lender will compare your cash flow projects and credit history to figure out whether to approve you. They may also look at your business credit score and how long you’ve been in business.

Upon approval, you’ll repay the funds you borrowed plus interest. You may be able to receive your funds quickly, in just a few business days. This is great news if you require cash as soon as possible.

The Pros of Cash Flow Financing

Just like any financial product, cash flow funding offers several noteworthy advantages to small business owners such as:

  • It Can Grow Your Business: If you opt for cash flow financing, you can use the proceeds to finance projects that have a direct impact on your business growth. If you’ve been in the startup phase for a while or are ready to open new locations or expand your offerings, it can be a good solution.
  • Various Types of Cash Flow Loans Available: There are a number of cash flow loans available so you can choose the ideal one for your needs. Some examples include term loans, business credit cards, credit lines, invoice financing, and merchant cash advances.
  • No Collateral: Many lenders who offer cash flow funding don’t require collateral, so you won’t have to risk losing a valuable asset. Therefore, cash flow financing is considered an unsecured loan.
  • Fast Funding: Once you get approved for this type of small business loan, you can receive the money quickly. Sometimes, it may only take a few business days, depending on the online lender. 

The Cons of Cash Flow Financing

The greatest drawbacks of cash flow funding include:

  • Proof of Cash Inflows Required: You’ll need to show that your business cash flow grows at a steady rate. If you don’t have cash flow statements or other financial statements that do so, you may not get approved. 
  • Good Credit May Be Necessary: Some lenders that offer cash flow loans only approve borrowers with good or excellent credit scores. If your business credit score is low, you may not qualify for a cash flow lending option. 
  • Not for Long Term Investments: Cash funding is designed to help you cover short-term investments. These investments may be hiring new employees or locking in a good deal you can’t pass up. If you’d like money for longer-term investments, you may want to consider alternative options. 
  • Strong Business History May Be Necessary: If you own a startup, you may have trouble qualifying for cash flow financing. Many financing lenders prefer to approve businesses who have been operational for at least two years. 

When Does Cash Flow Financing Make Sense?

There are numerous situations in which cash flow financing may be a good idea. It can help you do the following:

  • Pay for Equipment and Inventory: If a certain circumstance increases demand for your products or services, you may need to purchase special equipment or more inventory. In this case, cash flow funding is a wise option. 
  • Get Ready for Peak Periods: Depending on the nature of your business, you may have peak periods where you’re busier than usual. Cash flow financing may provide you with the funds you need to get through these hectic times.
  • Hire More Employees: During peak periods or times where you’re busier than usual or experiencing growth, you may need more staff to support your business. Cash flow funding can cover hiring, training, and payroll costs. 
  • Add a Brick and Mortar Location: If you operate online, you may consider a brick and mortar location to boost your profits and take your brand to the next level. Since the costs of a brick and mortar location can add up very quickly, cash flow funding may be the way to go.
  • Take Advantage of a Deal: Sometimes, you’ll have a limited amount of time to lock in a deal. Whether the deal is a great commercial property or discount on inventory or supplies, cash flow funding can allow you to secure it. 

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A Cash Flow Business Loan Can Set Your Business Up for Growth

If you’d like to finance certain aspects of your business as it grows, cash flow funding may be worth considering. Before you move forward with cash flow funding, however, do your research. Compare various lenders and loan options so you can make the best choice for your unique business and goals. 

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].