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.
Related: What’s a lean startup & is it right for you?
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:
- Payroll
- Inventory
- Rent
- Marketing
- Insurance
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.
The Takeaway
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.
Learn more:
This article originally appeared on LanternCredit.com and was syndicated by MediaFeed.org.
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.
Personal Loan:
SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student Loan Refinance:
SoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lender’s receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
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.
Life Insurance:
Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC. Click here to view our licenses.
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How do you get a small business loan without collateral?
When your small business takes out a loan, how does the lender know you’re going to pay it back? There are a number of ways. In certain situations, when you apply for small business loans, you’re required to provide what’s called collateral. This helps ensure that the bank or lender you’re working with sees you as less of a risk when it comes to paying back the loan.
We’ll get into why that is, what situations might require you to provide collateral and how to get a small business loan without collateral if you qualify.
Related: 10 personal finance basics
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No matter where you apply for a small business loan, the lender will look at how much risk you present.
One indicator of that level of risk is your credit score. If your business or personal scores are low, this may indicate that you may not always have been financially responsible in the past. Maybe you’ve taken on more debt than you could afford. Maybe you’ve missed credit card bills. Maybe you have a bankruptcy on your record. All of these may concern a lender since it is primarily focused on the likelihood that you will repay the loan.
Because of that concern, some loans may be secured, meaning that they require collateral. Unsecured loans, by way of contrast, don’t require collateral. Collateral is typically an asset that you possess. When you put it up as collateral, you are agreeing that the lender can seize it if you are unable to pay your loan. The lender can then sell this asset to cover what you owe. Some examples of collateral that small businesses may have include the following:
- Heavy machinery
- Equipment
- Real estate
So, let’s say that you’re applying for a $50,000 secured loan. You might put up your office space, if you own it, as collateral. If you weren’t able to pay the loan, your lender has the right to seize that property to cover the balance of what you owe.
Collateral is not a commitment to take lightly. Putting up collateral like the real estate you’ve worked hard to get could jeopardize your business. That’s why you might want to learn how to get a small business loan without collateral when it’s possible so that you don’t put your business at risk.
Some lenders require collateral because they offer low interest rates. A collateralized loan presents less risk for the lender that it will not recuperate its investment in you, so it’s able to be competitive and get your business with a low interest rate.
Other lenders require collateral because they cater to people who might not qualify for other financing by offering bad credit business loans. For businesses with bad credit, loans through a bank might not be an option, so they may feel the need to go with lenders that have more collateral requirements in terms of collateral.
There are also specific loan types that require collateral, such as invoice financing and equipment loans. Invoice financing (and the related invoice factoring) uses the value of the business’s unpaid invoices as collateral, and equipment loans use the equipment you’re purchasing as that asset.
Ridofranz
Small business loans without collateral can have both benefits and drawbacks.
Pros:
- May have a shorter loan application process. since the lender doesn’t have to assess the asset.
- You won’t jeopardize your business as you would if you couldn’t pay the loan and your assets were seized.
- You can build your credit history.
Cons:
- May have a higher interest rate than secured loans that require collateral.
- You may not be able to borrow as much as with a collateralized loan.
- You are still liable for the loan.
Let’s dig a little deeper into the details.
fizkes/istockphoto
These loans have a number of benefits. There’s more paperwork with a loan that requires collateral and the asset must be assessed and valued, so it can take longer to process. A small business loan without collateral would typically take less time to process and give you your money faster. Because you aren’t putting up your commercial real estate or equipment for the loan, there’s no risk that you will jeopardize your business by allowing those assets to be seized if you can’t pay the loan. (Of course, you will still have to figure out a way to pay back the loan.)
And one of the best benefits of any small business loan is that you can build your credit by paying on time each month.
Depositphotos
In researching how to get a small business loan without collateral, you’ll find that it isn’t all roses and sunshine. There are definitely some possible downsides
First, these loans tend to have higher interest rates, since you aren’t putting up collateral to lower the lender’s risk. Also, the value of the collateral you put up often determines how much you’re eligible for. So without that collateral, you may not be eligible to borrow as much.
And while, no, you won’t have your assets seized, you are still liable for the loan. If you don’t pay it back, the lender could take you to court.
DepositPhotos.com
When you want to get a small business loan without collateral, it’s important to first determine whether you would qualify for an unsecured loan. Researching small business loan terms before applying can be helpful.
As already mentioned, getting a small business loan without collateral is often based on your risk level, though some loans simply require collateral from all applicants.
Here are some business loans and whether they require collateral or not.
DepositPhotos.com
Small Business Administration (SBA) loans are the gold standard for business loans because they offer the lowest rates and may be easier to qualify for than bank loans. Some SBA loans require collateral, others do not. It’s often left to the discretion of the SBA lender to determine whether collateral is required, based on all qualifications.
However, with the 7(a) program, no collateral is required for loans up to $25,000. For 7(a) loans over $350,000, according to the SBA, the loan must be collateralized “to the maximum extent possible up to the loan amount.”
DepositPhotos.com
Banks and credit unions may choose to require collateral for business loans at their discretion. Bank of America, for example, offers both secured and unsecured business loans and lines of credit. With its lines of credit, collateral may not be required for lines of $100,000 or less. PNC Bank also has both secured and unsecured small business loans available.
Companies that offer online business loans may also offer both secured and unsecured loans. With the unsecured loans, however, you may need to provide a personal guarantee, which means that if your business can’t pay back the loan, you personally will have to.
DepositPhotos.com
Another of your no-collateral business loan options is the merchant cash advance. It’s not technically a loan; rather, you’re borrowing against future credit card sales. You pay back the advance by automatic withdrawals from your debit and credit card sales daily or weekly.
jat306 / istockphoto
If you don’t qualify for one of the no-collateral loan options we’ve discussed, it may be time to consider how to improve your creditworthiness, because that’s likely what’s keeping you from getting an unsecured loan. Start by checking what both your personal and business credit scores are.
You may not have a business credit score if you haven’t been in business long or haven’t taken out credit under your business’s name. If that’s the case, you may want to learn how to build business credit so you’ll qualify for more types of financing.
See where your personal score is and consider how you could work on it if you need to. Here are a few strategies to help rebuild your credit history:
- Pay your credit cards and loan payments on time.
- Reduce your debt to income ratio by paying down debt.
- Keep credit accounts long-term.
Farknot_Architect / istockphoto
Getting a small business loan without collateral isn’t difficult, but it may take some legwork on your part, especially if you aren’t able to qualify for unsecured loans right now. But rest assured: There are options that don’t require collateral, though you may pay more in interest for them.
Learn more:
This article originally appeared on LanternCredit.comand was syndicated by MediaFeed.org.
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.
Personal Loan:
SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers.
The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website.
More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student Loan Refinance:
SoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers.
The lender’s receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
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 09/30/21. 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.
Life Insurance:
Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC.
DepositPhotos.com
Featured Image Credit: istockphoto/monkeybusinessimages.
