The Ultimate Guide to Cashflow Financing
Everyone knows that cash flow is one of the most important things to consider when running a business – but what about cash flow financing and funding?
In this guide, our team of experts will give you the ins and outs of this finance option.
We’ll look at the basis of its financial terms, which businesses can use it, and the benefits. This guide will also take a closer look at the different types of cash flow, seeing which ones can help form the basis of this dynamic solution.
Let’s get started!
Cash Flow Finance: at a glance
Cashflow financing can help companies structure solutions that can help out when cash is usually tight.
In the day-to-day running of a business, we know that larger overheads or issues such as late payments can cause problems for the internal flow of cash.
As such, cashflow financing can aid business growth in the present and supplement investment in operations for the future, by providing funding support by leveraging future cash flow.
Working capital can be unlocked from a lender, such as Time Finance, providing a little more financial breathing room. This can be used to ensure outgoing factors, such as suppliers, employees and HMRC are paid in a timely manner – while offering room for growth and investment.
Many businesses looking to expand their existing offering or enter new markets find invoice financing especially handy, as it can propel them to achieve these goals earlier than expected.
What do we mean by cash flow?
Making sure you have enough cash for outgoing expenses – regardless of whether your business is profitable – is an important aspect of running a business.
As such, a positive cash flow is one of the most crucial parts of keeping things moving. But what do we actually mean by this?
In a nutshell, ‘cash flow’ is the complete amount of cash that is being plugged in – and out – of a company (hence the ‘flow!’). Ensuring that the levels of cash are at optimum levels is how many companies are able to continue normal business operations, as shortages or cash flow issues can have major repercussions – especially when it comes to paying staff or suppliers.
There are many different ways that business cashflow can occur.
These are usually credited as three sources, which are:
When it comes to a business’ cash flow statement, the first thing that is listed is usually ‘Cash Flow from Operating Activities’ – or CFO. This shows the amount of money brought in from everyday, regular business activities, such as the production of goods or sales.
Also listed on a cash flow statement is money raised from investing activities (or CFI). This logs long-term uses of cash, through the sale or purchase of a fixed asset like equipment or property. Money made from the sale of a split, merger or acquisition will also fall into this category.
‘Cash flow from Financing Activities’, or CFF, simply depicts the net flows of cash that is actually being used to fund the business.
Debt, equity, and dividend transactions are all part of these financing activities, which provides investors with insight into how strong a company is financially. It also lets them know if a business’ capital structure is managed optimally.
How does cash flow impact this particular finance practice?
Cash flow finance is often used by businesses to access additional working capital, helping them keep up with existing financial commitments without having to stunt their internal cashflow.
This can also be used flexibly, with obtained capital also helping to bridge gaps in operations, such as managing overheads and new acquisitions.
When it comes to lending, a funder can dispense capital by looking at a ‘prospective statement of cash flow’.
This is because a company is usually borrowing from a chunk of their future cash flows that they are hoping to produce, with lenders basing a payment schedule based around this expected cash inflow.
Here at Time Finance, we also analyse the historical cost of sales and flows to secure their investment, offering the business an amount based on their past and predicted findings.
Why is there a need for cash flow statements?
Essentially, cash flow statements can help businesses to understand and track exactly where their money is being spent. This can provide a little extra clarity when it comes to staying on top of financial commitments, assisting owners in making informative decisions that’s based on reviewing historical data and cash flow forecasting.
All cash flow is reported on a business’s cash flow statement (CFS), which actively records a company’s net income or profit for a set period of time.
These cash flow statements are especially handy when it comes to supporting applications for finance through lenders like Time Finance – whereby a report of incomings, outgoings, projected forecasts for the future are essential when raising capital.
What about projecting future cash flows?
Of course, lenders can’t just take historical factors into account. They need to look at a company’s receivables – which are payments such as outstanding invoices owed from customers – and are usually collected anywhere between a month or three months in the future.
As a result, accounts receivables represent future cash flows from today’s sales. To estimate how much cash will be generated in the future, lenders like Time Finance can estimate how much receivables will be collected.
Accounts payable, which include money due to suppliers and other short-term debt obligations, must also be accounted for by a lender. Cash flow forecasting can be done by calculating the net cash generated from receivables and payables, with the lenders like Time Finance determining the funding amount based on how much cash is generated.
However, lenders might have their own guidelines on what’s needed for businesses to be approved for cash flow financing.
Other factors, such as outstanding debt and credit rating requirements also come into play, which will have to be assessed before the value of a loan is released.
Spot the difference: asset based lending VS cash flow financing
Although the two may cross circles, cash flow financing is different from other asset-based lending solutions, such as an asset-backed loan.
An asset-based loan is a method of borrowing money that enables companies to use an asset listed on a balance sheet as collateral against the loan itself. It does this by using multiple forms of finance – such as an invoice finance solution or a business loan – to raise capital from within the company.
One aspect of this asset can be equipment, inventory, machinery, invoices or property.
In a similar way, cash flow financing uses the proceeds of the business as collateral for the loan.
Cash flow financing, however, doesn’t make use of tangible or fixed assets. This means that the collateral, which is the projected proceeds from cash flow, is what secures the value of the loan.
As a result, asset-based finance is often used by businesses with a lot of equipment and valuable assets, while cash flow financing is typically used by businesses with a high cash turnover but little physical equipment.
What are the benefits of cash flow financing?
There are many reasons why businesses would opt for this form of finance – which is why we’ve made it easy to see why it might appeal in this handy list.
Longer and flexible terms: Cash flow loans can often be structured between 5 to 7 years and are tailored to the borrower’s bespoke requirements. A balloon payment is typically used to postpone repayment or lessen the monthly amount, but this may depend on the lender’s discretion.
Less collateral needed – Compared to other loans and asset finance solutions, cash flow loans are typically backed by cash flow statements or are unsecured loans themselves. They will extend their lending without the need of expensive physical assets or equipment as a lien, providing businesses with important financing to support expansion and growth.
For superior business finance solutions, partner with us
If you’re a financial intermediary, you’ll know the right financial partners are necessary to launch your clients’ ideas and get them on the road to success.
When you work with Time Finance, we actively strengthen relationships with clients thanks to a proactive approach, paired with top-tier access to various financing options and a standout customer service philosophy.
Whenever you need us, you can count on our Business Development Team to provide first-rate service that has seen us assist thousands of brokers and businesses up and down the country.
Time Loan Finance Limited is authorised and regulated by the Financial Conduct Authority, under firm reference number 710117, for mortgage broking activities. Registered office: Second Floor, St James House, The Square, Lower Bristol Road, Bath BA2 3BH. Registered in England with Company No. 7117511. Commercial Mortgages, Property Development, Buy-To-Let Mortgages and Lending to limited companies is not regulated by the Financial Conduct Authority.