There are multiple reasons why you will need loans for business. As an existing business, you can expand and invest in more inventory, staff, or space. You may need to buy stock or increase cash flow to avoid a temporary liquidity crisis. These are all valid reasons, and they all have funding opportunities. When considering them, it is significant to understand all the terms and how they affect your future business.
One type of loan that deserves special attention is the cash flow loan. Before you take out a cash flow loan, you should fully understand the impact on your business.
What are cash flow loans?
A cash flow loan is an unsecured borrowing used for the day-to-day operations of small businesses. Loans funds working capital such as inventory, salaries, rent payments, and many more, and you repay the money with the company’s incoming cash flow.
A cash flow loan differs from a traditional bank loan that requires a long healthy credit history. Instead, in determining the terms of a cash flow loan, the lender evaluates the borrower’s ability to generate cash flow.
For example, a bakery owner is looking for $10,000 to buy bread, pastries, cookie ingredients, wrapping paper, and boxes. With only a stove and a few pieces of furniture, this small business needs more assets to get a traditional loan from a local bank. The owner looks for lenders for cash flow loans to buy the materials. The bakery will repay the $10,000 loan with interest to convert the product to cash in the coming weeks.
How do cash flow loans work?
Cash-flow financing borrows future money, and the lender decides whether or not to approve it based on those projections and past performance. Lenders use computer algorithms that consider entire data, such as transaction frequency and volume, seasonal sales, expenses, recurring customer revenue, and even the company’s customer reviews.
On the plus side, if your business has revenue to support it, you can avail of cash flow loans even with poor credit. The application process is reasonably straightforward, and decisions are relatively quick, usually within 24-72 hours. Depending on the lender, you can borrow from $5,000 to $250,000.
With some business loans in NZ, the borrower pays back the loan from a percentage of their sales until the loan is paid off. With other services, you pay a fixed amount over some time, so your payment is always the same.
How are cash flow loans different from traditional business loans?
Traditional business loans are usually based on securing the loan with an asset. So, if a business owner pledges their car or family home as collateral, that asset can be at risk. Cash flow loans take a better approach. In many cases, business health is used to evaluate loan applications for small amounts, such as less than $100,000.
21% of companies in New Zealand cite funding as one of their biggest challenges. So, when a small business needs more cash flow, it usually needs it quickly. In other words, timing is often critical, with small business owners citing the “slow process” as one of their most significant pain points when seeking funding.
Here’s why the cash flow lending process is so smooth:
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Fast
You can apply in minutes. Lenders take the decision quickly.
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Easier
These business loans in NZ often require less paperwork than a traditional loan.
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Structured for Business
Repayments are tied to cash flow (usually daily or weekly).
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Transparent terms of the loan
The repayment amount is pre-determined. There are no penalties for early repayment.
What are the cash flow lending benefits?
Diversification into cash flow credit will boost both your own business and that of your customers. It is a win-win situation.
There are several benefits of cash flow loans for business:
- Diversify client portfolios to create new long-term revenue streams.
- Access the expertise of lenders in niche small business markets.
- Added value to existing and new customers.
- Help build and grow small businesses in New Zealand.
- Provides security for small business customers whose primary goal is stable cash flow.
When are cash flow loans convenient?
Business owners often make the mistake of using working capital to pay for growth initiatives, leading to liquidity crises. It is not wise to bury your cash in capital assets or other significant investments when you do not have a buffer to fall back on. It can lead to significant cash flow problems, which you can avoid if the business uses financing instead. It is a common pitfall for many entrepreneurs.
A cash flow business loan NZ may be helpful if:
- Business include a history of positive cash flow, but now you are near the limit of your credit line
- Multiplying or developing a new product, but it will take time for sales growth to recoup the investments cost in marketing, new hires, or R&D
- Want to take benefit of supplier volume discounts with no straining cash flow
- Need to buy the inventory to meet a sudden spike in demand
- Top customers taking a bit longer to pay their invoices
What do you need to qualify for cash flow loans?
Lenders typically look at your cash flow health to check if your business qualifies for a cash flow loan for business and set financing terms.
Since you are not providing any collateral, the bank focuses on your accounts receivable quality, accounts payable, and inventory turnover to examine how you manage your cash flow. Bankers like to see good quality customers and pay as per their terms, suppliers being paid on time (though early enough), and rapidly moving inventory items. In addition to historical and projected cash flows, bankers typically review other information such as earnings projections, financial statements, company management, owners’ personal credit histories, and net worth.
End Takeaway
Many businesses, at some point, seek an injection of cash to meet challenges or seize opportunities. If you can guide your company to smart and reliable solutions, it can make a big difference to your business. It helps everyone seek better opportunities and grow.