Cash Flow Loans: A Primer

James Pruitt, Senior Staff Writer

Cash flow loans are distinct from traditional business loans. Small business loans usually need collateral. A secured loan generally requires the abandonment of property to the creditor in case of default. These are known as “asset-based loans.” These loans place a lien on the property, which the creditor may collect upon default. Cash flow loans are another story. With a cash flow loan, the borrower uses future earnings as collateral. These loans may suit a business with steady earnings but not many valuable assets. For example, an online business may lack the equipment or real property necessary to secure a traditional loan.

To qualify for a cash flow loan, a borrower should keep regular cash flow statements. Careful record-keeping is essential to secure approval. In these cases, lenders check histories of accounts payable and accounts receivable before approving the distribution of the funds.

Cash flow loans generally have a quick and simple application process. However, the process can also be more expensive. Lenders must analyze the incoming and outgoing funds to ensure the business is a worthwhile risk.

These loans are generally term loans, and these days usually come from online lenders. Term loans provide money for a specific amount for a specific period and have set terms for their interest rate. Borrowers must follow these terms precisely. Usually, cash flow involves an online application and a quick decision, often within a day. 

Small Business Association, or SBA, loans generally are not cash flow loans. SBA loans do require collateral and take a much longer time to issue financing.

Remember that not everyone benefits from cash-flow financing. These loans are expensive, often with very high APRs. In addition, lenders require frequent payments. Finally, borrowers usually must guarantee the loans, and lenders can go for their assets in case of default. 

Some examples of well-known cash-flow lenders include Lending Tree, Kabbage, Biz2Credit, and Lendio. Other lenders may advertise regularly on the Internet, but Veteran Business Owners should carefully research these companies before taking the plunge. Remember that the market for online lenders allows a lot of room for exploitation, and the responsibility for vetting these lenders falls mainly with the borrowers themselves. 

However, many borrowers find the speed and efficiency of the application process worthwhile. For the most part, this kind of loan serves business owners experiencing an unexpected bump in the road. The default rate may be higher, and the lenders often compensate with harsher terms. Hence, Veteran Business Owners should take care not to fall victim to predatory lending practices.

In short, cash flow loans have their pros and cons. Veteran Business Owners should use these loans sparingly, and carefully research the lender. However, during an emergency, such loans may grease the wheels and help the business regroup. In the end, such loans can save the business, but at the same time, the borrower should not become dependent on them. Dependence can lead to a cycle of debt that a business owner may find themselves struggling to free themselves from. 

By James Pruitt – Senior Staff Writer

Small businesses certainly need on-hand cash, and lots of it. A new business owner needs at least enough to cover any kinds of emergency costs, or unexpected costs, even on an everyday basis. But what happens when too much of a business’s assets remain as static, inert cash? Money should make money if not working further in other ways towards the business’s goals.

Small businesses can in fact have too much cash on hand. That cash should work for the business rather than lay stagnant in bank accounts. However, the art of cash flow management is very challenging and eludes many business owners.

The concept of return on assets can help a determination of whether standing cash does or does not work for the business. Return on assets simply asks the question of whether a business’s money or resources could better work somewhere else?   If the answer is negative, perhaps the owner should consider a diversification of the company’s portfolio. Business owners should consider and make such a determination once or twice a year.

What alternatives might diversify a company’s portfolio? Perhaps the redeployment of existing monies could better serve the company. Few metrics in business have greater importance than return on assets. Assuming a pool of cash stagnates in a forgotten bank account, what alternatives can revitalize that rotting pond? Many alternatives can diversify these assets. Among these are bonds, healthy stocks, and CDs.

Depending on the nature of your company and the legal considerations, the best option may be removal of funds to your personal retirement account or your kids’ college account. Consider whether legal considerations restrict your company from intermingling personal from business funds (such as partnership or incorporation situations). However, such options should be readily available to small business and home businesses.

Frequently recommended is six months of “operating cash” for your business. “Operating cash” generally means cash necessary for basic expenses such as recurring labor, utilities, rent, and recurring purchases. Assuming such cash in the coffers, owners may benefit in three ways.

First, standing operating cash backs up any outside negotiations. Business decisions should start from a position of strength. The toxic scent of desperation poisons business deals. Vendors, partners, and suppliers often smell this scent before the owners themselves. Owners should always maintain some wiggle room for negotiation. The best deals do not happen when the owner needs something tomorrow. Having six months of cash flow on-hand relieves the urgency of this type of tension.  Decisions under excessive stress rarely provide the absolute best outcomes.

Second, the past ten or fifteen years warns of the inevitable ebb and flow of the economy. Always assume dry spots. Six months of on-hand cash may guide your business through those straits. Just as individuals should keep personal emergency funds, businesses should keep that six months of operating cash for economic emergencies. Small businesses especially will not regret it.   The current pandemic has changed all of the dynamics and rules.

Third, consider the development of your company. Much can happen in six months. Your business plan may change, you may get new ideas, you may discover new opportunities. A six-month supply may allow owners to redirect their business ventures, and see new ideas come to fruition.

On-hand cash flow is important. Businesses should always have emergency funds. However, stagnant cash does small businesses no favors. Options are limitless for secure management of unused cash. Whether through investments, lucrative deals, or new ideas, business owners should stream those monies out of that stagnant pond, assuming the money does not work for the company in situ. As always, balance is the key.

VAMBOA, the Veterans and Military Business Owners Association, hopes that you have enjoyed these articles addressing various aspects of Cash Flow.   We work very hard to bring our audience timely and valuable information.

VAMBOA does not charge members any dues or fees.  If you are not yet a member of VAMBOA, please join here:   https://vamboa.org/member-registration/

Members may use our seal on their web sites and collateral and will receive special discounts and other important information.

By Debbie Gregory.

Cash flows in and flows out. Cash flow is important and is a key indicator of a company’s health. As discussed in the previous article, cash flow is different from profitability. Cash flow measures the liquid assets on hand, while profitability relates more to the long-term expansion of the company.

Different types of income and expenses break into different categories of cash flow. We can break these down into (1) “operating cash flow,” (2) “investing cash flow,” (3) “financing cash flow,” and (4) “other cash flow.”

Differentiating types of cash flow helps businesses create a cash flow statement. These statements are important both for internal accounting and tax purposes. Each type of cash flow may require its own equation for records maintenance. These records are important for any company’s operations procedures, regardless of the company’s size.

• Operating Cash Flow

“Operating cash flow” comes from a variety of sources. On the incoming side of the equation, “operating cash flow” might include the direct cash revenue from goods or services is one such source. Outgoing cash flow might be employees’ wages, purchase of supplies or equipment, utility bills, overhead, or payments on loans. Other types of operating cash flow, besides direct revenue, may include interest on loans and payments from lawsuits. The most common formula for “operating cash flow” is the following: Net Income + non-cash expenses + changes in working capital.

• Investing Cash Flow

“Investing cash flow” may or may not be relevant depending on the size or operations of the business. Such cash flow may be incoming or outgoing.  Examples may include business acquisitions, insurance settlements, or loans originating from the business or business owner. Generally, the equation from “investing cash flow” is earnings from any investments minus any liabilities, such as loan payments or insurance liabilities.

• Financing Cash Flow

“Financing cash flow” moves between owners, investors, and creditors. The owners themselves could move cash into the company from their own savings or other income sources. Aside from owners, investors or creditors may contribute to the financing of the company. Investors, for their part, could overlap with creditors, who could issue loans or other financial arrangements.

In consideration of the interests of investors and creditors, owners should consider the appropriateness of moving cash out of the company coffers, depending on circumstances. The most common formula for “financing cash flow” is the following:

Financing Activities Cash Flow = CED – (CD + RP). This formula could help a company issue a cash flow statement.

• Other Cash Flow

Other types of cash flow might involve charitable contributions, earnings or costs for company events, or any variety of incentives for employees, assuming use for the company’s business purposes. Calculation methods may defer to the owner’s convenience and operations procedures.

• Cash Flow Statements

The above four categories suggest methods of organization for cash-flow statements, for record-keeping purposes. Companies should issue a cash flow statement at least quarterly. The company’s management may use the above classifications at their discretion.  However, the statements themselves are necessary records for any company’s archives, both for outside requests and internal reference.

We hope that you have enjoyed this article and the prior one on profitability.   We work hard to bring our audience timely and important information.

We do not charge members any dues or fees.  If you are not yet a member of VAMBOA, please join here:   https://vamboa.org/member-registration/

Members may use our seal on their web sites and collateral and will receive special discounts and other important information.

By Debbie Gregory.

Cash-flow and profit margin both relate to the health of a company. However, each term relates differently to the company’s bottom-line. Cash-flow is important to a company’s expansion and potential. Profit margin is a different concept that may relate more directly to the company’s bottom line.

Cash-flow governs the everyday workings of the company. Cash flow may come from any of a variety of sources, including the owner’s personal funds, investors, or loans, as well as revenue. Cash flow pays the bills, the employees, and the creditors in the short-term. Profits matter in the long-term, especially in the wake of large investments from investors or creditors.

For a smaller company with an independent cash flow, operations may continue for quite some time (or even indefinitely) before turning a profit, based on the enthusiasm and motivations of its operators. This is especially true with a home business. For a larger enterprises, profits must ultimately keep up with the cash flow. This is especially true when the original investors become creditors demanding payment.

So how do we more specifically define profits versus cash flow? “Profit” is basically the same as “net income.” Within a given period, your “profit” is your business revenue minus your expenses (including cost of providing products and services and overhead).

But how to manage cash flow? Assume a loan of $15,000, with a payment plan of $500 per month. That initial loan provides a healthy cash flow early in the history of the company, but the subsequent $500 per month will eat just that much into the profit margin.

Financial experts sometimes consider cash flow a better indicator of a company’s performance than profit margin. Cash flow affords better opportunities for growth. Cash flow may indicate better credit on the part of the company, and greater enthusiasm on the part of investors. By extension, the incoming monies may signal a brighter future for the company.

On the other hand, profit holds a different importance to the company’s bottom line and plans for expansion. A small side-business can emphasize profitability from the get-go, absent lofty ambitions. Smaller enterprises need not incur debt. Entrepreneurs with bigger plans must consider cash flow while they can maintain their company in the growth stage before reaching the critical mass necessary to generate independent profits.

A small business should consider maintaining a “cash flow statement” that details their periodic cash flow. These statements are called “free cash flow,” or “FCF” statements. In order to calculate your “FCF,” you should:

(1) calculate your operating cash flow

(2) subtract your capital expenditures

(3) on the chance that your company pays dividends, subtract your dividends, which are shares of profits paid to part-owners of the company.

Business owners should carefully monitor both cash flow and profits, for the sake of the progress of their company, as well as tax considerations. Cash flow could originate from an excited or generous relative, or a small business loan, or any of a variety of sources. Profitability depends on total revenue minus expenses, including negotiated payments to investors or lenders.

Profitability may indicate long-term success, but cash flow generally indicates engagement with the economy and a vibrant outlook for success. Healthy cash flow demonstrates that the company functions in the here and now. In many cases profitability may come afterward.

We hope that you have enjoyed this article and the prior one on profitability.   We work hard to bring our audience timely and important information.

We do not charge members any dues or fees.  If you are not yet a member of VAMBOA, please join here:   https://vamboa.org/member-registration/

Members may use our seal on their web sites and collateral and will receive special discounts and other important information.

By Debbie Gregory.

Managing your business cash flow can be challenging but it is incredibly important to the success of your business.

Below are 12 easy ways to help you improve your cash flow:

1.) Put It All In Writing

Make sure that all your business documents, customer agreements, and invoices clearly set out your payment terms, expectations, due dates, etc. Never leave any important items ambiguous.

2.) Send Invoices Immediately

People tend to pay once they have an invoice in hand, never make them wait.

3.) Include a Specific Due Date

It is very important to make your expectations as clear as possible. Simply stating “due upon receipt” is not enough. Add a clear due date or time frame (such as “payment due within 30 days of the bill date”).

4.) Offer an Incentive for Quick Payment

People love getting things for free. If you can offer them some sort of incentive for paying early, they will be more motivated to do so. For example you could give them a small discount for paying within a week of invoicing.

5.) Add a Late fee

Adding a fee for being late with payment tends to motivate most to get the bill paid quickly. Without a late fee, some people may put off paying you for months.

6.) Put together a Payment Plan

Allowing people to pay off large bills over time allows them to better budget for the expense and makes it easier for them to pay the bill.

7.) Use Electronic Billing or Electronic Funds Acceptance

Using electronic billing allows you to get the invoice to the customer very quickly as well as saving you money on postage costs. Accepting electronic payments works the same way.   It is fast and cost effective. You want to make sure that you accept payment in a variety of ways to make it easier for people to pay you.

8.) Sell your Invoices

If you need cash fast, there are services out there that will pay 90-99% of your original invoice amount upfront for a small fee.  Make sure they are reputable and do not harass your clients.

9.) Hold off paying your own bills

While you wait for your own clients to pay you, hold off on paying bills until they’re actually due. Of course take advantage of any incentives for early payment, but wait on the others.

10.) Secure A Credit Line

If you need help with your cash flow consider a line of credit with your local bank.

11.) Actively Monitor Your Cash Flow

Keep a close eye on your cash flow. Make sure that you know what has been paid and what is about to become due. Send reminders if necessary and make sure that you track any late fees.

12.) Hire a CPA

A CPA can help you in many areas.   They can guide you towards your financial goals, offer corrective suggestions, ensure you are taking advantage of the correct tax breaks or benefits, improve your cash flow, and so much more.   They can pay for themselves in savings.