How Cash Flow Loans Work
If a business is just starting out and has no solid credit history or assets to be used as collateral, cash flow loans are a good option to obtain capital. For such businesses, lenders often consider loans as risky to the lender and, as a result, they have higher interest rates. In some cases, a borrower may need to sign a personal guarantee. This means that they agree to individually repay the issued loan in case the business becomes unable to pay it back.
However, if your business lacks other funding options, cash flow loans may be the way to go. You get a chance to finance your day-to-day operations and grow your business. But you just need to ensure that you repay as soon as possible to avoid financial distress.
The Pros and Cons of Cash Flow Loans
Just like all types of loan, cash flow loans offer some advantages but also have drawbacks that should be carefully considered before taking out a loan.
The Pros of Cash Flow Loans
Here are the biggest advantages of cash flow loans for business owners:
- Don’t require a strong credit rating: Even if your business is just starting out and has no perfect credit ratings, you can apply for cash a flow loan. The lender just needs to assess your cash flow generation capacity.
- Less documentation is required: You don’t need a load of business documentation to apply for a cash flow loan. The loan is backed by your business’s expected cash flows.
- No collateral is needed: You don’t need significant business assets to secure your loan. It’s possible to get a cash flow loan with a newer business that hasn’t been up for years.
- Quick access to money: Cash flow loans require no thorough credit check. This means that the process is quick and you can access the money within a short time.
The Cons of Cash Flow Loans
Here is what you should think of before choosing this type of loan:
- Proof of good cash flow generation capacity is required: Because your credit rating and business assets aren’t considered much, you have to prove that your business can generate a good cash flow. So, cash flow statements are essential for getting approved.
- High interest rates: The loans, being risky to the lender, come with high interest rates. That’s because they don’t fully consider credit scores or take collateral.
- Not for long-term investments: Cash flow loans are used for day-to-day business operations and have to be repaid quickly. For long-term investments, you might need other financing options.
If you still don’t know what type of loan is best for developing your business, contact us at Blursoft to get insight from our loan experts!
