Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Cash flow disruptions can happen to the best-run small businesses, and it’s smart to have a financial plan to weather these times. Small business cash flow loans offer the opportunity to bridge the revenue gap when you’re waiting for invoices to be paid or for other types of funds to come in.
What Is a Cash Flow Loan?
A cash flow loan is a type of financing that allows you to borrow against future revenue. It can be structured in a number of different ways to suit your needs or your business model.
Traditional banks typically focus on eligibility criteria like credit, time in business, and financials. These things may still be considered by a cash flow lender, but not to the same extent that they would be for a more traditional loan. Instead, for a cash flow loan, lenders typically judge your ability to repay the loan based on revenue projections.
Depending on the financing structure, your loan payments could be based on a percentage of future credit card transactions or your unpaid invoices. Alternatively, you might apply with a lender that offers a line of credit to help with cash flow or a loan with a fixed repayment term.
How Do Cash Flow Loans Work?
There are several types of cash flow loans, each of which comes with its own structure for receiving funds and repaying them. Overall, small business loan rates are usually more expensive for this kind of financing than for other options (like SBA loans). But the eligibility requirements are usually more relaxed.
Different Types of Cash Flow Loans
Let’s consider some of the most common kinds of cash flow loans.
- Online Loans: It’s possible to find online business loans for small businesses that offer help with cash flow. With these loans, typically you’ll receive a lump sum and then make payments on a regular basis. You can find online loans with terms lasting just a few months, all the way to several years, depending on the lender.
- Merchant Cash Advance: A merchant cash advance lets businesses borrow a sum of cash based on projected credit card transactions. You’re charged a factor rate instead of interest, which is combined with the amount you borrowed to calculate your total debt. Payments are then automatically deducted as a percentage of your credit card sales. In some cases, payments can also be automatically deducted from a business bank account on a fixed schedule.
- Invoice Factoring: Invoice factoring advances a portion of a company’s unpaid client invoices. Depending on your industry, you might receive anywhere between 60% and 90% of the outstanding invoice amounts. In many cases, the factoring company then takes over the collection process. Once the invoices are paid, you receive the remaining balances, minus the lender’s fees.
What Is Asset-Based Business Lending?
Asset-based lending is any type of financing that uses property as collateral to secure the loan. Examples of the kinds of assets that might be used include equipment, inventory, invoices and real estate. Asset-based lending is usually used when businesses can’t qualify for more traditional loans. That’s because generally the interest rates and fees are higher. Additionally, you run the risk of losing any assets used as collateral to secure the loan.
How Can a Cash Flow Loan Be Used?
Funds borrowed through a cash flow loan are typically used for ongoing operating expenses, such as the following:
Different lenders may have their own guidelines on how the funds may (or may not) be used.
How to Find a Cash Flow Loan
Once you understand the types of cash flow loans for small businesses, narrow down your choices to the ones that make sense for your business model. For instance, merchant cash advances are designed for companies with regular credit or debit card transactions.
Invoice factoring, on the other hand, is suited for companies that regularly invoice customers. A cash flow loan or line of credit usually suits a broad range of business types. You can use a lender platform like Lantern by SoFi to access multiple loan offers and find the one that suits your company. You may also want to consider exploring other funding opportunities such as small business grants, which don’t have to be repaid.
Cash Flow vs. Asset-Based Loans
Although asset-based loans may be used for some of the same purposes as cash flow loans, they’re not the same.
1. Loan Process
The biggest difference between cash flow and asset-based loans is what the lender focuses on when reviewing your application (cash flow versus assets that will be used as collateral).
Additionally, for both types of financing, you typically don’t have to worry about meeting the definition of a small business the way you would with an SBA loan. Lenders can create their own eligibility criteria rather than adhering to SBA requirements.
2. Processing Time for the Loan
Processing time varies by lender but both types of loans typically feature fast funding times. This is especially true if you apply with an online lender.
3. Collateral for the Loan
Cash flow loans generally don’t require collateral beyond the projections for the revenue that will be used to repay the loan. Asset-based loans, on the other hand, require some type of collateral to secure the loan. This could be in the form of inventory, equipment or real estate.
4. Repayment of the Loan
Repayment depends on the structure of the loan. Asset-based loans usually have a fixed repayment schedule while cash flow loans are likely to rely on your future revenue in some way. Oftentimes, you’re required to enroll in some type of automatic payment linked to your business bank account or point of sale system if you’re using a merchant cash advance.
Can You Get a Cash Flow Loan with Bad Credit?
Cash flow loans are primarily based on sales performance and projections. Potential lenders typically review your company’s transactions and other data to determine your ability to repay the loan. Each lender differs in terms of how much it weighs both business and personal credit scores.
Especially if your company has a good revenue history, a cash flow loan could be an option when your business needs help covering operating expenses.
Lantern by SoFi:
This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. (www.nmlsconsumeraccess.org)
All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented. The actual terms you may receive depends on the things like benefits requested, your credit score, usage, history and other factors.
*Check your rate: To check the rates and terms you qualify for, Lantern conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender(s) you choose will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown on this website are from lenders and are estimates based upon the limited information you provided and are for information purposes only. Estimated APR includes all applicable fees as required under the Truth in Lending Act. The actual loan terms you receive, including APR, will depend on the lender you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the lenders and not by SoFi Lending Corp. or Lantern. Please review each lender’s Terms and Conditions for additional details.
Student Loan Refinance:
Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).
Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 01/31/22. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.
Auto Loan Refinance:
Automobile refinancing loan information presented on this Lantern website is from MotoRefi. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.
Secured Lending Disclosure:
Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.
Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC. Click here to view our licenses.
More from MediaFeed:
How do you get a small business loan without collateral?
Featured Image Credit: istockphoto/monkeybusinessimages.