What is a Cash Flow Loan? Here's Everything You Need To Know
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A cash flow loan is a term loan provided based on your company’s past and forecasted cash flow. It is typically used by e-commerce businesses to fulfill working capital needs, such as payroll and inventory.
As a form of unsecured loan, cash flow loans do not require pledging of tangible assets as collateral. You may, however, be required to sign a personal guarantee over the loan.
Cash flow loans are suitable for e-commerce companies which are currently in short supply of working capital, but expect strong cash flows in the future.
For the following types of businesses, cash flow lending could also give you access to capital which may not be available via other routes:
- Your company has not been in business long enough to build a strong credit history
- You do not have adequate physical assets to back a loan
Pros of cash flow loans
- No physical collateral required: As its name indicates, this type of loan is cash flow-based, not asset-based. Collateral is not required to secure a cash flow loan.
- Less emphasis on history: Your company’s capacity to generate future cash flows is the major determinant of whether you will be approved for a loan.
- Quick access to capital: Compared to other lending options (e.g. traditional bank loans), approval for cash flow loans has relatively short turnaround time.
Cons of cash flow loans
- Rigid repayment schedule: Repayments in fixed amounts must be made on schedule.
- Higher interest rates: Cash flow loans are usually sought by companies that do not have robust credit histories or lack tangible assets to back the loans. Therefore, lenders would charge higher interest rates to compensate for greater default risks.
- Automatic repayment: Some lenders may require automatic payments to cover the increased risks of lending to you. For example, installments of repayment may be taken directly from your bank, PayPal or merchant processing account.
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