There are multiple reasons why small and new businesses fail, poor cash flow management is one of the biggest contributing factors.
According to one study, a staggering 82% of new businesses fail as a result of poor cash flow management, alongside a failure to understand this concept of working capital and how it can benefit your venture.
With this in mind, we’ll look at the importance of cash flow finance in the article below, while asking how this works and its associated costs.
What is Cash Flow Finance and How Does it Work?
Cash flow financing is an iteration of invoice financing, through which a loan is made to a company and backed by their expected or forecast cash flows.
Cash flow itself refers to the amount of money that moves in and out of a business during a specific period of time, and companies can experience significant issues when the more capital leaves the business than is banked in earned income each month.
Certainly, cash flow financing can prove highly beneficial for businesses that deploy 60 or 90-day invoice terms with clients. It’s also helpful to firms that generate significant amounts of cash from their sales but lack tangible physical assets (such as equipment or commercial premises), which is typical for some ecommerce brands.
The loan is subsequently paid back from earned income and inflowing cash in the future, according to the company’s sales forecasts and estimates.
Why Would You Use Cash Flow Finance?
As we’ve already touched on, cash flow finance offers value in a number of different instances.
For example, this is widely used by new businesses for which capital is in short supply. This may be as a result of extended invoice terms negotiated by clients, or for firms that have to repay initial startup loans or overheads once they start trading.
During such periods, you may require money to cover your operational costs and fill the void left by extended invoice terms, and cash flow financing can help in this respect.
Similarly, you may require some initial borrowing to help fund your company’s growth. However, if you lack a track record trading or any tangible assets that can be used as collateral, traditional lending options may be unavailable.
In this case, you can leverage your projected sales and incoming cash flow to secure a short-term loan, before repaying this directly out of earned income in a predetermined period of time.
What Costs are Associated with Invoice Financing?
Before you apply for a cash flow finance loan, you may want to consider the associated costs involved.
Firstly, there’s likely to be an administration fee for processing your financing application, with this likely to be a percentage of the total amount borrowed.
So, it’s worth planning in detail and borrowing the precise amount that you need where possible, while comparing the market to identify the best real-time offers.
The same principle applies to the rate of interest, which lenders apply to the agreement to secure a viable profit. Make no mistake; the rate of interest in play here will be considerably higher than bank loans, so securing competitive deals will help to reduce the amount that you repay over time.
Understanding such costs is crucial if you’re to make an informed decision, so bear them in mind before checking out what the market has to offer!
