The Ultimate Guide to Cash Flow Financing in 2024

Running a small business comes with a fair share of challenges. Late payments, seasonal fluctuations and unexpected expenses can quickly put pressure on even the most profitable of businesses. These cash flow disruptions can put the brakes on your growth plans and even threaten the day-to-day operations of your business. But it doesn’t have to be that way.

Cash flow financing is a game changer for businesses facing tight cash flow or looking to seize new growth opportunities. This guide covers everything you need to know about cash flow financing, from how it works to practical tips for your business. Whether you're managing daily operations or exploring growth opportunities you'll find the insights needed to make cash flow financing work for you.

What is cash flow financing and why is it important for SMEs?

Cash flow financing is a type of financing where a business borrows money based on its expected future income. Instead of relying on physical assets as collateral, businesses use their projected revenue to secure the loan.

Lenders evaluate a business’s cash flow statements along with information from the accounts receivable and payable to forecast future cash flows. These loans are generally short-term in nature as they are designed to cover immediate financial needs such as working capital, inventory purchases or wages.

Cash flow is the lifeblood of small businesses: some 82% of those which fail go under due to cash flow issues, according to a study by Score.

Positive cash flow allows a business to meet its expenses, invest in new opportunities and weather financial downturns. The ability of a business to expand and grow is significantly reliant on cash flow.

What are the three types of cash flow?

Operating Activities, which include the cash flow from day-to-day business operations.

Investment Activities, which is the cash flow from future ventures.

Financing Activities, which is cash flow from bank loans, equity and dividends.

How does a cash flow loan work?

A cash flow loan provides funds based on your business’s cash flow: Here's how it works:

Lenders evaluate your business’s cash flow health by reviewing past cash flow data and future projections. They examine accounts receivable, accounts payable and inventory turnover to understand how you manage cash flow, which helps to determine the loan amount, interest or factor rate, repayment term and structure of the loan.

The loan amount is determined by your business’s ability to generate cash. If your business has strong and consistent cash inflows, you may qualify for a larger loan.

The loan is repaid directly from the cash generated by business operations. Lenders usually schedule repayments based on your business’s cash flow patterns, such as weekly, monthly or quarterly.

Unlike traditional loans that might require physical assets as collateral (such as property or equipment), cash flow loans frequently do not require up-front collateral to be used as a security against the loan. This makes them accessible to businesses without significant physical assets.

Cash flow loans typically have variable interest rates, which may be higher than asset-backed loans because the lender assumes more risk by relying solely on your cash flow.

At Bizcap, we take into account qualitative and quantitative factors to gain a holistic view of a customer’s financial situation and business opportunities. This approach allows Bizcap to say “yes” more often and is why we have such a high approval rate.

Is cash flow the same as profit?

No, cash flow and profit are not the same thing.

Profit is the amount of money a business makes after all expenses and costs are deducted from total revenue, whereas cash flow measures the flow of money into and out of a business.

There are a few important differences between cash flow and profit:

• Cash flow is tracked on an ongoing basis, whereas profit is calculated over a specific period (e.g. monthly, quarterly, annually)
• Profit includes non-cash expenses like depreciation, whereas cash flow focuses only on cash movements.

Both cash flow and profit are crucial for good business management: profitability helps to secure long term success, whereas adequate cash flow is required for day-to-day operations.

How can you be cash flow positive but not profitable?

A business can have positive cash flow but be unprofitable because:

Borrowing money or selling shares improves cash flow but does not count as profit.

Selling an asset generates cash but may not result in profit, particularly if sold at a loss.

Expenses such as depreciation decrease profit but do not impact cash flow.

Receiving cash from previous sales (accounts receivable) boosts cash flow but not current profits. Furthermore, deferring payments (accounts payable) keeps cash in the business without affecting profit.

What is an example of a cash flow financing?

Small businesses know financial stress all too well. Rising expenses, fierce competition and seasonal fluctuations can give even the most resilient entrepreneur a headache. At Bizcap, alleviating financial stress is our priority.

John, a cattle farmer and butcher shop owner faced cash flow issues, Covid setbacks and droughts. His shop was bleeding cash as he tried to build up his customer base. John's perseverance and Bizcap's ongoing support helped him overcome these hurdles and smooth out his cash flow until his business got back on its feet.

To read the full article click here.

What are the benefits of cash flow lending?

Businesses facing imminent financial obligations or growth opportunities benefit from quick access to capital that cash flow lenders provide. At Bizcap, for example, we can approve loans in as little as 3 hours, with same-day funding.

Businesses with few tangible assets benefit from cash flow financing, as the loans are typically offered based on their projected revenue rather than assets.

Cash flow financing offers liquidity for day-to-day operations, plugging cash shortages.

What are the risks of cash flow lending?

Regular repayments can have a long-term impact on cash flow, especially if your business’s revenue projections are not met.

Cash flow loans often have greater charges and interest rates than asset-backed loans due to the increased risk for lenders.  

Relying on cash flow finance can lead to a cycle of dependency, where your business can only operate with the help of loans. It can also compromise your business’s long-term financial security by draining resources through high interest repayments, limiting a business’s ability to reinvest in growth and build sustainable cash reserves. However, when used effectively, cash flow loans can help businesses overcome short-term shortages in working capital and seize growth opportunities.

Are cash flow loans secured?

Cash flow loans are generally unsecured. This means lenders don’t require physical assets such as property or equipment as collateral to secure the loan.

Instead, lenders use the business’s cash flow and revenue generation as the primary basis for approval. This allows businesses to access financing without risking their tangible assets; however, the lender often charges higher interest rates as a result of the greater risk.

What can cash flow lending be used for?

Cash flow lending is designed to be used to cover your regular business transactions, for example, paying staff salaries, settling bills, taking advantage of new business opportunities or buying new equipment.

At Bizcap, we offer cash flow loans for any business expense or investment, be that covering expenses or investing in opportunities for growth.

Can cash flow loans be used to help seasonal businesses?

Cash flow loans can absolutely be used to help seasonal businesses. In fact, seasonal businesses are a prime example of when cash flow finance is particularly useful, as it can help businesses put everything in place to secure a successful peak, whilst still meeting day-to-day obligations in slower seasons.

What are the most common cash flow challenges SMEs face?

It’s not uncommon for small businesses to face cash flow challenges. As businessman and philanthropist David Tang puts it: “the three most dreaded words in the English language are ‘negative cash flow’. The most common cash flow challenges faced by small and medium enterprises (SMEs) are:

• Late Payments and Outstanding Invoices:

Delayed customer payments can create cash flow bottlenecks for small businesses, leading to delays in meeting operational expenses and financial obligations.

• Seasonal Fluctuations:

Seasonal businesses such as retailers, pool maintenance or tour guides often face cash flow challenges during off-season periods. Learn more about how to navigate seasonal fluctuations here.

• High Operational Costs:

Expenses such as rent, utilities, wages and supplies can quickly creep up on businesses when funds are not available to cover the costs.

Practical tips for managing cash flow

1. Everyone loves a discount. Offering discounts is a great method of improving cash flow as it provides incentives for customers who pay their invoices early. Not only does it improve cash flow but also relationships with customers.
2. Designing and selling branded merchandise such as t-shirts, mugs or bags is a unique and creative way to provide an additional revenue stream while also promoting your brand.
3. Negotiate better terms with suppliers: asking for extended payment terms or bulk-buy discounts to manage expenses more effectively.
4. Getting on top of your cash flow early will save future problems down the line.
5. Getting financial software to track cash flow in real time could be a life-saver. Getting a short-term loan to plug cash flow gaps or seize business opportunities. Learn more about Bizcap’s Small Business Loans.