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Understanding cash flow financing

Our Cash Flow Financing Resource Hub has been set up to help SME's understand their options when it comes to the various business cash flow solutions on offer. We explore ways you can begin improving your cash flow situation and start getting your business on track to positive cash flow.

We compare a range of cash flow solutions to make sure your business gets the right product and the best deal

Looking for ways to boost your business cash flow? Get in touch or call us on the freephone number below to have a chat with one of our friendly cash flow financing experts.

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What is cash flow finance?

Cash flow financing is a method that enables businesses to leverage their expected cash flows to secure funding from a finance provider. Essentially, it involves obtaining a loan based on the cash flows that a business generates, using these future cash flows as a means to repay the loan.

Cash flow represents the movement of money into and out of a business, making cash flow financing a strategic option for businesses looking to unlock additional cash without needing physical assets as collateral. 

A key challenge that many businesses face is the delay between providing services or delivering goods and receiving payment for these, often ranging from 30 to 90 days. Late invoice payments can exacerbate this issue, leading to significant financial strain. To mitigate these challenges and improve working capital, many businesses turn to Invoice finance as a straightforward and rapid solution. However, cash flow financing offers an alternative by focusing directly on the anticipated cash flows of the business.

How does cash flow financing work?

Cash flow financing works by providing businesses with a loan that is specifically intended to be repaid through the future cash flows the business generates. Here's a step-by-step overview of how it operates:

  1. Assessment of cash flows: A finance provider evaluates the business’s past and projected cash flows to determine the amount of funding that can be safely provided.
  2. Loan agreement: Once the provider is confident in the business's cash flow stability and projections, they offer a loan. The terms of this loan, including interest rates and repayment schedules, are tailored based on the assessed cash flow.
  3. Cash flow funding provided: The business receives the loan, which it can use to cover various needs such as operational expenses, investment in growth, or smoothing out cash flow inconsistencies.
  4. Repayment: The business repays the loan over time, with payments scheduled according to the predicted cash flow. This often includes a portion of the interest and principal with each cycle of cash flow.

This cash flow funding method is particularly appealing for businesses without significant physical assets but with strong cash flow projections. It allows for more flexibility than traditional loans, which might require tangible collateral. Moreover, cash flow financing can be an excellent tool for businesses that experience seasonal sales fluctuations or have growth opportunities that exceed their current cash reserves.

 Cash Flow FAQs

What are the 3 types of cash flows?

There are 3 types of cash flow and they come from:

  • Operating Activities – cash flow from day to day running of business
  • Investments – cash flow from future ventures
  • Financing – cash flow from bank loans, equity and dividends
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What is a cash flow example?

Cash flow is calculated over a specific period of time, usually a standard reporting period, and is the difference between the cash received by a business from sales of its goods or services and the cash spent on its operations, financing and investments.

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Does cash flow include salaries?

Cash paid out to employees as a salary appears in the operating cash flow section of a cash flow statement. It is part of the cash flow calculation.

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What are the best cash flow businesses?

The best cash flow businesses are the ones where the day to day running costs are low and the market position is high. They will be receiving regular sums of cash into the business but will be paying out much less, this will generate a good cash flow. Examples include freelancing, consultancy, online and service industries with minimal overheads.

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How do you explain cash flow?

Cash flow is the net amount of cash that a company has at any time, it is difference between money coming into a business minus money spent to keep the business running. It can be either positive or negative.

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How is cash flow calculated?

Cash flow is calculated by subtracting cash spent on operations, financing and investments from cash received from sales of goods or services, financing and investments.

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What is considered a good cash flow?

Cash flow is usually considered good when the ratio of incoming cash to outgoing cash is greater than 1 (Incoming cash/outgoing cash). If the ratio is greater than 1 it indicates that there is more cash coming in to the business than going out so cash flow is positive and is available to meet short term financial obligations.

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Why is cash flow so important?

Cash flow is important because it determines whether your business has the cash available to remain solvent as well as its ability to meet any future requirements for capital and growth.

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Why would a business need cash flow finance?

Cash flow is one of the biggest financial challenges that any small business will face. Without readily available cash, it can be really hard to push on and grow the enterprise, and in severe cases, it can even threaten the viability of the business. This happens when cash flow is so poor that there are few funds available for things like payroll, rent, and other essential monthly commitments. But what some of are the biggest problems with cash flow for small businesses? 

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It’s worse for some industries than others, but any business owner or accounts officer will know just how expensive it can be to keep a modern firm going. It’s these (often monthly) expenses that are what really eats into cash. Any business that’s finding that too much cash is leaving the accounts every month might look to making some cuts, or looking for alternative and cheaper suppliers. Never do anything that might impact profit however, as this could ultimately make matters worse.

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Unpaid invoices are perhaps the biggest contributor to problems with cash flow, and they can affect businesses of any size. At any time here in the UK, hundreds of millions of pounds are outstanding, and this can be really harmful. Fortunately, if your biggest issue is late invoices, there are plenty of ways you can improve the situation. Tightening up on credit control, effectively tracking and chasing invoices, and being careful with terms can all help to get those invoices paid when they’re due. There are also financial products on the market, such as invoice finance, which can help remove some of the worry over late payments.

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A lack of profit will naturally mean less cash coming into the business. Start-ups can often face challenges in this regard, because their unestablished reputation can make it harder to secure lower rates for goods and services that they might then sell on. This is why it’s so important for new market entrants to be able to offer something different to competitors. If you can ensure your product stands out - whatever it may be - then you stand a better chance of being able to apply a strong profit margin that doesn’t have to directly compete with other businesses.

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Finally, a lack of planning can actually be much worse than you might expect. The dates that money comes in and goes out can have a surprisingly large effect on cash flow, and poor planning in this regard might mean dipping into an expensive overdraft unnecessarily. As best you can, forecast for when you expect money to arrive and leave the accounts. This will leave you better prepared, less likely to experience short-term issues, and less likely to need help with your cash flow.

What are some ways to solve cash flow financing problems?

Cash flow funding options are widely understood to be the lifeblood for businesses both small and large. Without it, it can be difficult to meet those monthly commitments, such as rent, wages and product costs. Unfortunately, it’s very common for SMEs to have cash flow problems, arising for all manner of reasons. Fortunately, there are a few different ways to improve cash flow:

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It seems obvious, but one of the key ways you can resolve cash flow problems is to improve the difference between your income and outgoings. Generating new revenue is clearly the trickier element to this, so you should look to free up cash each and every month as a first port of call. Many businesses are surprised by the amount they can save through a diligent fact finder that looks at where costs could be saved.

This isn’t about having a knee-jerk reaction and making sweeping changes to the business - it’s about looking at how small savings can quickly add up. Contracts for things like energy and insurance are two places in which another look at the market could end up saving you a considerable amount of cash. Go to the different parts of the business, and see where people have ideas to reduce costs without fundamental changes to the way things work.

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Late invoices are one of the biggest contributors to cash flow problems. Often, a business is successful, and balancing income and outgoings isn’t too much of a problem. However, if customers aren’t paying their invoices when they should, it can make bringing cash into the business really difficult. There are a few ways you can improve this, at various stages in the process. The first thing to bear in mind is that you need to make invoice terms as clear as possible, which will reduce the likelihood of customers pushing things to the limit. You’ll also need to take a proactive approach to chasing invoices when they fall late - never allow a late payment to be your own fault for not chasing enough.

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There are a variety of financial products available on the market that can help you get round cash flow issues. Overdrafts can be useful if you find that you rarely have cash flow issues, perhaps at certain points of the year. You can use the cash when you need it, and then repay when things even out, without having to have an ongoing commitment or negotiate every time you need finance. Invoice Finance is another option that seeks to resolve the issue of cash flow, particularly when it comes to late payments of invoices. In short, it means that you don’t have to wait for a customer to pay to receive money into your account.

Are slow invoice payments causing you cash flow funding problems? 

Release up to 90% of the invoice straight away with our invoice finance solutions.

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Contact our friendly UK advisors on our freephone

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Useful resources for businesses

Cash Flow Terms

In our Cash Flow terms section, we will explore them all in more detail and offer advice as well as lots of useful resources along the way.

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Invoicing Explained

Invoicing is essential for small businesses. They are the business documents that enable companies to be paid for their services. A popular way to get started with invoices are to use invoice templates.

Discover more

Finance Terms

It's important to understand all the key financial terms when running a business. To help, we’ve put together the most common terms in you're likely to come across as an SME and how to understand them for future use

Discover more

Business Cash Flow Loans

Put simply, a business loan is where a sum of money is lent to a company over a period of time, and the monthly payments and interest rate are fixed over the agreed term. Business loans help your cashflow position and can be extremely helpful for a business by offering a short term finance option.

Discover more

Our digital onboarding process has revolutionised cash flow financing in the UK

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Cash flow insights from the blog

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Have you thought about invoice finance as a cash flow finance solution for your business?

Invoice finance allows you to release cash quickly from your unpaid invoices.

As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.

Invoice financing products from Novuna Business Cash Flow:

Invoice Factoring

  • Release cash tied up in unpaid invoices quickly and easily
  • Great for relieving the burden of credit control. Novuna Business Cash Flow will chase payments and manage the credit control on your behalf
  • This will allow you to concentrate on other areas of your business instead of spending time chasing late payments
Invoice Factoring

Invoice Discounting

  • Release cash tied up in unpaid invoices quickly and easily
  • This is a confidential facility so you continue to manage your own credit control and chase late payments
  • This facility is available to SMEs with a turnover of £500,000 and above
Invoice Discounting

Payroll Finance

  • Payroll or Recruitment finance provides recruitment agencies with a full back office administration system and invoice finance facility to aid cash flow for one simple fee
  • A complete recruitment factoring solution

Credit Protection

  • With Credit Protection, up to 90% of your eligible debt is protected against insolvency or prolonged non-payment, minimising the impact on your business
  • You can add the protection to your Invoice Finance facility at any time
  • We’ll work with you to help you understand where the potential for bad debt lies within your debtor book
  • We’ll then work with you to maximise the level of protection
Credit Protection

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