Cash Flow Loans For Investors
 

What Is Cash Flow Loans?
A cash flow loan is a type loan, in which a bank or any other money lending institutions lend funds to a company for working capital, using the expected cash flows generated by the borrowing company as collateral for the loan. A company's cash flow is determined by the amount of cash that flows in and out of a business in a specific period.

In cash flow loan, a lender examines the cash flow generation capacity of the borrower when determining the terms and conditions of a cash flow loan.

Cash flow loans or cash flow financing —uses the generated cash flow as a means for loan repayment. Cash flow loan is helpful to companies that generate significant amounts of cash from sales but don't own a lot of physical assets that would serve as collateral for the loan.

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Understanding Cash Flow Loan

If a company is having a positive cash flow, it means the company is making enough cash from revenue to meet its daily financial obligations. Banks and creditors review a company's positive cash flow in order to determine how much credit to give to a company. You can apply for either short-term or long-term cash flow loan depending on your business size and cash flow forecast.

Cash flow loan can be used by companies looking to fund their operations or acquire another company. Companies are borrowing from a part of their future cash flows that are expected to generate. In turn, banks or creditors create a payment schedule according to the company's projected future cash flows as with an analysis of historical cash flows.

The Cash Flow Statement

All cash flows of a business are reported on a company's cash flow statement (CFS). The cash flow statement records the company's net income for the reporting period.

The cash flow statement records any investing operations, such as investments in securities or investments  in the company itself, such as purchasing equipment. Furthermore, the cash flow statement records any financing activities, such as raising money through lending or issuing a bond.

Projecting Cash Flows

The two major areas that are important in any cash flow projection are a company's account receivables and account payables. Accounts receivables are payments owed from customers for goods and services sold, they are reported as assets in the balance sheet. Accounts receivables might be collected within 30, 60, or 90 days in the future.

Accounts receivables are future cash flows for goods sold and services rendered today. Banks or lenders can use the expected amounts of receivables due to be paid by customers to help forecast how much cash will be generated in the nearest future.

Accounts payable is the opposite of account receivables. Accounts payables are short-term debt obligations, such as money owed to suppliers of goods and services. A bank must also account for the accounts payables. The net amount of cash generated from receivables and payables can be used to project cash flow. The amount of cash generated is used by banks as a means to determine the size of the loan.

Banks might have specific rules regarding the extent of positive cash flow required to get loan approval. Also, banks can have minimum credit rating requirements for a company's outstanding debt in the form of bonds.

ALSO READ: Working capital loan For Small Business

How Does a Cash Flow Loan Work?

Cash flow loans work differently depending on the type of cash flow lender you apply with. All lenders will start by requiring a credit application so they can run credit. Having good credit isn’t a requirement for most cash flow lenders, as they emphasis more on revenue than credit history.

If the business shows sufficient credit and does not have any disqualifying incidents such as defaults, current bankruptcy, etc the lender will then move on to analyze the company’s cash flow. By looking at a company’s main operating bank account statements and/or the company’s credit card processing statements, the lender will get an accurate view as to how well the company is cash-flowing every month.

The lender will examine the company’s cash flow by viewing the total deposit amount, number of deposits into the bank account, daily average balance, minimum monthly balance, number of bounced checks and insufficient funds, number credit card processing transactions, total credit card deposits, etc. After examining the data for the past 3-6 months, the lender will calculate how much they think the small business will be able to repay comfortably on a daily basis. Afterwards, the lender will multiply that amount by a term ranging from 3 months up to 60 months, and supply that amount to the business in the form of a loan or advance.

Cash flow loan repayment is done either on a daily, weekly or monthly basis in different forms including regular monthly payments, or by daily or weekly remittance through bank account or through remitting a percentage of each day’s credit card transactions until the loan is fully repaid.

Cash Flow Loan vs. Asset-backed Loan

Cash flow loan is different from an asset-backed loan. Asset-based loan helps companies to borrow funds, but they use an asset on the balance sheet as collateral for the loan. Assets that can be used as collateral include equipment, inventory, machinery, land and building, company vehicles.

The bank puts a lien on the assets that are used for collateral. If the company defaults on the loan by not paying back the principal and interest as at when due, the lien allows the bank to legally seize the assets.

Cash flow loan uses the cash being generated as collateral for the loan. However, cash flow loan doesn't use fixed assets as collateral.

Companies that use asset-based loan for financing are big companies with plenty fixed assets, such as manufacturers, while companies that use cash flow loan are small companies with small assets, such as service companies.

Example of a Cash Flow Loan

A tailor is seeking $10,000 to purchase 3 sewing machines, an electric iron, as well as needles and clothes hanger. With only a few furniture fixtures, the small business does not have enough assets to obtain an asset-based loan from a bank close to his shop. He turns to an online lender he discovered while browsing the internet for a cash flow loan to finance the inventories. As the tailor turns his products into cash over the next months, it repays the $10,000 loan with an additional interest.