Cash Flow Financing Meaning
Cash flow financing is a form of business financing where a borrower will be issued a sum of money by a lender. This will be done as a loan, and the borrower must repay the initial capital they received, as well as interest based on the agreed upon rate. Although this is very similar to any other loan, it does come with a much lower interest rate.
However, a cash flow financing loan is much different than a traditional loan in one major way. A traditional loan will be backed by tangible assets that the lender has accepted as collateral, whereas the repayment plan for a cash flow loan is based on cash flow statements given by the borrower.
Just like any type of loan, a cash flow financing loan would either be the unsecured, or the secured type. If the loan ends up being an unsecured loan, then that creates a “good news/bad news” scenario. The good news would be that the borrower would not have to put up any collateral. However, that would also correlate to a much higher interest rate and a smaller loan limit.
Cash flow financing took a hit in 2009 due to the economy but has bounced in a big way since then, with many small to mid-size companies taking advantage of its benefits. To put it simply, cash flow financing can free up working capital for companies in need. It can also give credit protection and helps companies meet their sales demands and production needs.
Cash flow financing grew to a peak in the year 2007 and 2008 before falling off dramatically in 2009, as previously stated. The resurgence since then leads experts to predict a 15% increase in funds this year for companies utilizing this financing. This is right in line with historical numbers, as cash flow financing grew an average of 15% each year from 2003 to 2008.
This method of financing isn’t just for smaller companies, as larger businesses benefit greatly due to the speed of this type of loan compared to any type of bank financing. This can be an ideal option for large businesses to turn to as an alternative to the strict constraints of bank lenders.
This type of loan is not devoid of potential risks and pitfalls, and a savvy borrower must keep these things in mind as they make a final decision. Any owner of a borrowing business absolutely must have a fall-back plan, and not be overly confident in terms of the repayment schedule as it relates to their cash flow. If the schedule for repayment is set in a harsh manner, the borrower can be in a very precarious position right from the start.
A business is not a single entity that controls its own destiny; it must interact globally in order to succeed. Even the most experienced and intelligent financial advisors in the world can’t predict the long-term prospects of a business. Guidance and preparation only go so far, a business must still stand on its own two feet in the business world.
In closing, even though a business may be thriving at the moment, there is always the possibility of a market depression meaning customers may no longer rely on your service or product as they once did. Furthermore, the business suppliers may need to increase their costs to you, which would directly cut into your bottom line.
There are so many variables with this type of business financing; a business owner must do their due diligence before coming to a final decision on whether to seek cash flow financing.