Understanding cash flow loans for small businesses

A type of financing aimed at providing businesses with the capital necessary to cover short-term expenditures or growth initiatives.

Are you looking for a way to improve you business cash flow?

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What is a business cash flow loan?

A business cash flow loan is an unsecured financing option that provides small businesses with the capital they need to manage short-term financial requirements or to support growth projects.

Differing from traditional loans that demand collateral, a cash flow loan is predicated on the anticipated future income of the business. This aspect renders it a particularly suitable choice for businesses that may not possess tangible assets as collateral but have optimistic revenue forecasts.

By concentrating on projected earnings, cash flow loans deliver a flexible financing solution that aligns with the operational needs of small businesses, allowing them to utilise their future profits for immediate financial assistance.

How do cash flow loans work?

Securing a cash flow loan involves a series of steps aimed at evaluating the business's revenue potential and structuring a loan that matches its financial capabilities:

  1. Application and review

    • Businesses initiate the process by applying with a lender that offers cash flow financing.
    • The application necessitates the submission of comprehensive financial statements and revenue forecasts.
  2. Financial assessment

    • The lender undertakes an in-depth examination of the business's financial records and projections.
    • This examination includes a review of past revenue streams, cash flow trends, and the overall financial health of the company to ascertain risk and determine the loan amount.
  3. Loan offer and terms

    • Following the assessment, the lender issues a loan proposal, detailing the loan amount, interest rate, and repayment conditions.
    • These terms are usually designed around the business's cash flow, ensuring the repayments are affordable.
  4. Funding

    • Once the terms are agreed upon, the loan is swiftly funded, granting the business the necessary capital.
    • This swift provision of funds is vital for small businesses that require immediate resources to fulfil financial commitments or capitalise on growth opportunities.
  5. Repayment

    • Repayment schedules are typically flexible, with the timeline adjusted to coincide with the company's revenue inflow.
    • Payment amounts may fluctuate, mirroring the business's sales performance, which can offer relief during periods of reduced revenue.

Cash flow loans are engineered to operate in harmony with a business's financial cycle, providing a supportive financing option that accommodates the distinct challenges and opportunities small businesses encounter. Leveraging future revenue, these loans offer a strategic mechanism for cash flow management and growth facilitation without the necessity for traditional collateral.

What are the advantages and disadvantages of cash flow loans for small businesses in the UK?

Advantages of cash flow loans:

  • Quick and affordable way to get a cash injection into your business
  • No need to secure the loan against your assets in most cases
  • Don’t always require in depth credit checks

Disadvantages of cash flow loans:

  • If you have a low credit score, you may have to pay more to borrow the money as you are a bigger risk to the lender.
  • Try to keep the repayment terms as short as you can to avoid paying lots of interest over a longer term.

Are you eligible for a small business cash flow loan?

A small business is defined as one whose turnover is less than £6.5 million, a balance sheet total of more than £3.26 million and doesn’t employ more than 50 people. So if your business fits these criteria and you need a short term loan to help with financing your daily operational costs to enable you to grow you can try applying for a small business loan.

Eligibility criteria for a small business loan can vary a lot and different lenders will have differing criteria. However it helps your application if you have kept up to date documents and statements from your business accounts as it allows the lender to see how much money is coming into and out of the business. It is also helpful for a lender to see your trading history, if it’s been profitable and if it looks like there is future potential to the business. Sometimes they need evidence of at least 2 years of trading but others will accept less. It will help if you have a good credit rating so any late payments of credit cards, mortgages and even household bills could count against you.

Eligibility will also depend on ability to repay the loan as small business loans tend to be taken out for a short period of time to help in the short term so monthly repayments could be higher than a normal loan.

What are the differences between a start up loan and a small business cash flow loan?

Start up loans:

  • Government-backed unsecured personal loan.
  • For businesses trading from 0 to 24 months in the UK.
  • Offers financial and practical support, including 12 months of free mentoring.
  • Allows each business owner or partner, aged 18 or over, to apply for up to £25,000, with a maximum of £100,000 per business.
  • Fixed interest rate at 6%.
  • Repayment period of 1 to 5 years.

Small business cash flow loans:

  • Available to any small business in the UK that meets eligibility criteria.
  • Interest rates and repayment periods vary depending on the lender.
  • Can be unsecured or more likely to be secured against business or personal assets, implying a greater risk.

What are the best ways to use a small business cash flow loan?

A small business cash flow loan can be used to invest in anything that will improve its future profitability and security.

There are many ways of doing this including using the loan to provide your business with working capital which can help with the day to day running costs that keep your business afloat. You could have a great business but sometimes short term issues will mean cash flow is affected, if cash flow is low you may no longer be able to pay wages, office rents and suppliers, a short term injection of cash via a small business loan could help you stay afloat and grow for the future.

It can help to buy essential business equipment that will help build up the profitability of the company in the future. A small business may not have the cash flow available in the short term for a large purchase so a small business loan could be useful in this case.

To invest in staff training and development and make sure they are keeping up to date with emerging technologies to improve the company’s ability to compete in a changing market.

To pay for advertising and marketing, this is essential for a small business that is looking for new clients and a small business loan invested in this way could be key for making sure you attract new business.

Get in touch

Contact our friendly UK advisors on our freephone

0808 250 0859

8:45 - 17:15 - Monday to Thursday &
8:45 - 16:45 - Friday

Have you thought about invoice finance as a cash flow loan 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 such as factoring (mainly invoice factoring and debt factoring) and invoice discounting to businesses depending on the situation and the level of control they require in collecting unpaid invoices.

We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our confidential invoice discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.

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The benefits of working with Novuna Business Cash Flow

  • Boost your cash flow without having to wait up to 120 days for your customers to pay you

  • Release up to 90% of the invoice straight away, and the final 10% when the invoice is settled

  • Access funds within 24 hours from initial appointment with our revolutionary digital onboarding process

  • Benefit from our in-house credit control processes, allowing you to focus on running your business, instead of chasing clients for payment

  • Six month trial period followed by a rolling contract

Want to understand more cash flow finance terms?

Our cash flow resource hub has been set up to help SME's with cash flow finance advice, tips and resources to help with their cash flow position.

We explore ways you can begin improving your cash flow situation and start getting your business on track to positive cash flow.

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