What is a Cash Flow Loan?
A cash flow loan is a loan, usually to a company, intended to meet daily cash needs during times when cash flow is inconsistent. These loans are short-term in nature; borrowers usually must repay them in 30 to 180 days.
How Does a Cash Flow Loan Work?
Let's assume Company XYZ imports and wholesales jewelry to retailers. Company XYZ makes most of its annual sales between May and August, when retailers are purchasing their Christmas inventory. Company XYZ's business is highly seasonal, and as such its cash flows hit their lowest in April of each year.
This year, Company XYZ receives an unusually large purchase order from a national retailer. It's great news, but Company XYZ does not have enough cash at this point to purchase the materials for this giant order.
To make it work, Company XYZ might consider getting a cash flow loan to cover the cost of the materials purchase. It can then repay the loan with the proceeds from the sale, which it expects to receive in July.
Why Does a Cash Flow Loan Matter?
Cash flow loans are essentially bridge loans. They are extremely helpful for companies that have temporary cash flow constraints, but they are not long-term solutions. Fees, interest rates, and collateral requirements can be high as well.