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A Guide to Cash Flow Loans for Small Businesses

Ezra Cabrera | October 25, 2022


    Small business owners need to be aware of their options when it comes to financing. A cash flow loan can be a great option for businesses with steady incoming revenue. This guide will help you understand how these loans work and whether or not they are a good fit for your business.

    Key Takeaways

    • Unlike traditional loans, cash flow loans rely on your past and future cash flow projections instead of your collateral or credit history. These are unsecured loans, so collateral is generally not required. Lenders won’t check your credit history, but it won’t heavily affect their decision even if they ask.
    • There are several cash flow loan options, but the most popular ones are business lines of credit, short-term loans, merchant cash advances, and invoice financing.
    • There is no one-size-fits-all when it comes to business financing. Evaluating your business and defining your goals and needs before applying for a cash flow loan is important.

    What is Cash Flow Loans for Small Business?

    A cash flow loan primarily relies on your business’ past and future cash flow projections instead of your collateral or credit history. The approval and application process is quick, and you’ll be able to receive the funds hours after approval.

    Lenders that offer cash flow loans are more lenient, so startups and bad credit borrowers may qualify. But the interest rates on these products are usually higher than a traditional business loan. Cash flow financing is perfect for small business owners looking for quick, unsecured funding.

    How Do Cash Flow Loans Work?

    Lenders are more concerned with your cash flow, so they may ask to see your bank statements, business financial statements, merchant accounts, and other documentation to evaluate your company’s previous and projected performance. 

    A cash flow lender uses this information to set your interest rates, repayment terms, and loan amounts. Some may ask to check your credit and business history, but this information will not heavily affect their decision.

    Cash flow loans can be structured like a line of credit, term loan, or merchant cash advance (MCA). With an MCA, you receive a lump sum of money and pay it back using a percentage of your debit and credit card sales minus a fee. 

    To sum it up, cash flow loans…

    • Don’t rely on your collateral or credit history

    • Have a quick underwriting process

    • Can be obtained by startups and businesses with bad credit

    • Are great for companies that need fast access to capital

    Pros and Cons of Cash Flow Loans


    Streamlined and automated applications. Online lenders are usually the ones that issue cash flow loans, and they offer a fully-automated, streamlined process. In most cases, you can complete the application in less than 10 minutes with minimal documentation required. Cash flow lenders often ask borrowers to connect their financial accounts to their platform so they don’t have to submit documents.

    Flexible requirements. Since lenders are more interested in your historical and projected business revenue when reviewing your application, they’re more lenient compared to traditional bank loan requirements. However, keep in mind that requirements vary depending on the lender. 

    Fast funding. Traditional banks and credit unions often take weeks or months to release the funds. If you need a fast business loan, cash flow lenders can approve and fund your business within 24 to 48 hours. 

    No collateral is needed. You don’t need to pledge your personal or business assets to secure a cash flow loan since lenders only need to check your cash flow.


    Higher interest rates and fees. Since lenders don’t ask for collateral and rely heavily on your business's cash flow to make a decision, they typically charge higher interest rates and fees to offset the risk.

    Short repayment terms. The repayment schedule for business cash flow loans is usually short and may require frequent daily or weekly payments. This can be difficult to manage, especially for seasonal businesses or those struggling with cash flow. If you’re not careful, you might get trapped in a cycle of debt.

    Automatic payments. Some cash flow lenders may require automatic payments to reduce the risk they will take. However, this can be challenging if you already have cash flow problems. Depending on your agreement with the lender, payments can be fixed or varied and can be taken out of your account daily, weekly, or monthly.

    4 Types of Cash Flow Loans for Small Businesses

    Several types of cash flow loans are available for small businesses, but the most common ones are business lines of credit, invoice financing, short-term loans, and merchant cash advances.

    Business Line of Credit

    A business line of credit is ideal if you’re looking for financing flexibility. Lenders give you a revolving credit line that you can withdraw from any time you need working capital for almost any type of business expense, like marketing and advertising, hiring new employees and more. You only need to repay the amount you’ve withdrawn plus the interest.

     Lenders decide on the credit limit, rates, and terms of the line of credit based on your creditworthiness. Businesses with bad credit can apply for business lines of credit, but those with higher scores have a better chance of qualifying.

     Another alternative to a business line of credit is a business credit card. Both options are similar; the only difference is that you can’t withdraw physical money with a credit card.

    Invoice Financing

    Small business owners dealing with a cash flow gap due to late customer payments and invoices can apply for invoice financing.

     This financing option gives you the cash you need upfront by using outstanding invoices as collateral. Instead of waiting for months to get paid, you’ll be able to receive payment in less than 24 hours after approval. Lenders generally advance 80% to 90% of the total invoice value. Once your customers have paid their dues, you’ll receive the remaining percentage and repay your advance, plus a fee of 1% to 5%.

     Invoice financing is a great option for businesses with capital tied to their invoices but needs cash to address short-term business expenses. It’s also an excellent option for companies with poor credit because lenders often look at your customers’ creditworthiness instead of yours since they’re paying the invoices.

    Before applying, check your financial information, especially if you’re looking to finance all or most of your invoices.

    Short-Term Loans

    A short-term loan is similar to your classic business term loans but with shorter repayment schedules. The repayment terms range from three months to two years with weekly or daily payments.

    It’s one of the most straightforward loans to qualify for, even for those with limited credit and business history. However, the less stringent review process significantly increases the lender’s risk, so they often charge higher interest rates and shorter terms to protect themselves in case of a default.

    While this may hinder you from getting a short-term loan, a short term loan is great if you prefer short-term debts, consistent repayment terms, and easy application and processing.

    Merchant Cash Advance

    A merchant cash advance (MCA) is technically not a loan, but it can provide you with short-term financing to improve cash flow. The lender will give you a predetermined amount of money upfront based on your past sales and future projections. The repayments are automatically deducted from your credit or debit card sales, so the higher your card sales, the faster you’ll repay the advance. 

    MCAs are great for small businesses needing quick working capital access to cover immediate expenses. However, this type of financing can be expensive since it typically carries high annual percentage rates and may create a problematic cycle of debt.

     The best route is to consider other types of financing before applying for a merchant cash advance.

    The Requirements Needed to Apply for a Business Cash Flow Loan

    The requirements vary depending on the lender and the type of loan you’re applying for, but here are some of the common things lenders usually ask for:

    •  At least one to two years in business, but some lenders provide financing to startups with strong revenues.

    • Business bank statements or access to a business bank account.

    • Information about your business (industry, revenue, financial projections, etc.)

    • Business tax ID (Social Security number or Employer Identification Number for sole proprietorships)

    • A “soft inquiry” personal credit check. This doesn’t affect your credit score, and the minimum credit score requirements for business cash flow loans are low and flexible.

    • Personal and business credit checks rule out businesses with negative information, like undisclosed debt, tax liens, or bankruptcy.

    How to Get a Cash Flow Loan

    Here’s how you can get a cash flow loan:

    Know your financial goals.

    You need to determine how you will use the loan, how much you need, and how quickly you need it before you apply. Borrowing too little can leave your business facing serious cash flow issues when emergency expenses come up. On the other hand, borrowing too much also risks paying more for interest, principal, and additional fees.

    Check your financial information.

    Check your past and projected revenue, cash flow, and other financial data that could affect your application. While your credit score is not a number one concern for lenders, you might want to check it out to see whether you can qualify for more affordable business financing options.

    Research and compare different lenders.  

    There are plenty of online lenders available in the market. To find the best option for your small business, research and compare potential lenders. Look at their interest rates, funding speed, payment terms, fees, customer reviews and service, reputation, and application process.

    This process can be overwhelming, especially for first-time borrowers. Working with a company like SMB Compass simplifies the process since our financial advisors will help you compare your options and provide advice.

    Submit your application.

    Online cash flow lenders have simple online applications that can be completed in less than 10 minutes. They usually ask for basic information about your business and upload some of the necessary documents.

    Review your loan contract.

    Carefully read through your loan agreement to make sure that the interest rates and repayment terms are correct. Some lenders may assign simple interest rates or factor rates instead of the usual annual percentage rate (APR), so you might want to compute the APR to get a clearer picture of how much the loan costs.

     Don’t hesitate to contact your lender if you have any questions or concerns about your contract. If a potential lender doesn’t answer your questions or won’t tell you the rates and terms, you might want to look for another lender.

    Is a Cash Flow Loan the Best Option for Your Business?

    Cash flow loans are best for businesses that need money for short-term or emergency expenses. Businesses with bad credit and insufficient credit history might also be an excellent fit for cash flow loans since credit score isn’t a primary factor in the application process. Those with no collateral or who prefer not to pledge any can also apply for cash flow financing. 

    Conclusion: Cash Flow Financing

    Regardless of the loan you’re applying for, it’s crucial to have a clear idea of how you’re going to use the money and if your future sales can cover the loan payments.

    With enough research and professional advice from a small business finance professional, you’re well on your way to choosing the best cash flow financing for your business.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.