Cash flow finance: everything you need to know

Written by James Dutton

What is cash flow finance?

Not every business has hard assets sitting on its balance sheet ready to be offered up as security, yet that doesn't mean funding options run out. Cash flow finance takes a different starting point altogether: rather than lending against property, equipment or stock, a lender looks at what a business earns and is likely to keep earning, and structures borrowing around that. It's a route many businesses turn to when asset finance or a secured facility simply isn't the right fit.

How is cash flow finance assessed?

A lender providing cash flow finance will generally look past the balance sheet and focus instead on trading history, turnover trends, and how consistently money moves through the business month to month. Bank statements, management accounts and recent trading performance tend to carry more weight here than they would with a conventional secured loan, since there's no asset to fall back on if things go wrong.

What is cash flow finance typically used for?

Businesses tend to reach for this type of funding to manage the practical, recurring costs of running day to day, including:

• Meeting payroll during a slower trading month
• Covering rent, utilities or supplier payments
• Bridging the gap before a busy season lifts income
• Taking on a new contract before the first invoice is settled
• Managing a short-term dip caused by a lost customer or delayed order

How does cash flow finance compare to a secured loan?

The clearest distinction comes down to what backs the borrowing. A secured facility ties lending to a specific asset, with the lender able to recover that asset if repayments stop. Cash flow finance instead ties affordability to the strength and pattern of a business's income, meaning a business without significant assets, but with solid, predictable trading, can still be considered.

This also tends to shape how quickly a decision can be reached. Without a valuation or legal charge to arrange, cash flow finance can often move faster than asset-backed borrowing, though the trade-off is usually a shorter repayment term and a higher cost of borrowing.

Benefits of cash flow finance

• Doesn't require property, equipment or stock as security
• Decisions can often be reached faster than with secured lending
• Affordability is judged on trading performance, giving asset-light businesses a route to funding
• Can be arranged even where a business's credit history isn't perfect, provided current trading supports it

Things to consider with cash flow finance

Cost: because it's unsecured and based on projected income, pricing is generally higher than secured borrowing.

Term: repayment periods are usually short, often running from a matter of months up to around a year, which suits a temporary gap rather than an ongoing shortfall.

Personal guarantee: a director or owner may still be asked to personally guarantee the debt, even without a specific asset attached to the facility.

Suitability: where cash flow pressure is a recurring, longer-term issue rather than a one-off dip, other forms of finance may be a better long-term fit.

What other options are worth considering?

A few alternatives may suit a business better depending on how the funding gap arises:

Invoice finance: releases funds tied up in unpaid customer invoices, which can suit businesses with a recurring cycle of delayed payment.

Revolving credit facility: allows funds to be drawn, repaid, and drawn again, which may suit businesses that expect to need short-term funding more than once.

Unsecured business loan: provides a fixed lump sum without requiring specific security, better suited to a single, defined cost rather than ongoing working capital pressure.

Why use a finance broker for cash flow finance?

Because cash flow finance is assessed largely on trading performance, the lenders willing to fund it, and on what terms, can vary widely from one business to the next. A broker working across a wide lender panel can help match a business's trading pattern to funders more likely to look favourably on it, rather than the business approaching lenders one at a time and hoping for the right fit.

MAF Finance Group can compare offerings from a wide range of banks and alternative funders to help find cash flow finance suited to your circumstances.

To learn more or get a quote, fill out the form below. If you'd like to speak to someone directly, call us on 0115 858 1010 and a member of our team will be happy to help.