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Small Business Loans for Cash Flow

Learn all about how business loans can be used for cash flow purposes, and why a cash flow injection may be able to boost your business.
Small Business Loans for Cash Flow

Updated on 25/09/2020

Understanding and managing cash flow is a key factor that could determine how successful a business is. Being able to increase your cash flow, maintain it, or inject more cash into your business when it’s struggling a little really could make a difference to your operations. That’s where a using small business loan to improve cash flow could be a game changer.

In this blog, we’ll explore how you could increase cash flow in your business and what exactly a cash flow loan involves.

Disclaimer: Esme Loans offer unsecured business loans which can be used for a variety of purposes- not exclusively for cash flow. Some lenders may specify cash flow as a primary usage in their lending criteria, so be sure to read the terms and conditions closely before signing a loan agreement.

Cash flow concerns for SMEs

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No matter the size of your business or the sector it operates in, managing cash flow can be a stressful experience. This may be especially true for SMEs. But, why? Well, cash flow is highly dependent on factors such as seasonal change or unexpected fees, and the cash reserves you have built up (in case you hit tougher times) are typically smaller for SMEs, so the process of managing cash flow can become quite turbulent and demanding.

It could also be rewarding, though, as developing a good understanding of how to manage and acquire finance for a small business, and knowing when to inject cash, could better position you for success.

What is a cash flow loan?

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When people use the phrase ‘cash flow loans’; they’re normally either talking about using a standard, short-term business loan for specific purposes, or taking out a loan specifically with a cash flow problem in mind. More often than not, businesses will take out an unsecured loan for cash flow purposes in order to strengthen day-to-day cash flow and help combat financial stress.

Cash flow loans may be appealing to SMEs as they base their acceptance on business performance and expected credit flow. This differs from alternative business loans which primarily base their approval on credit scoring meaning that many more businesses, including SMEs, are eligible for cash flow loans.

An additional benefit of opting for this form of finance is that they work well as emergency business loans. If something unexpected crops up in your financial year, and you need the money as quickly as possible, cash flow loans are particularly helpful in offering speedy solutions.

Depending on the loan (and loaners) you choose to partner with, the criteria for approval will differ. Although, generally speaking, the business must have been trading for a minimum of two years and be looking to borrow a figure above £5,000.

Is using a loan for business cash flow the right option for me?

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A lot of small business owners often assume it’s not possible to get a loan for their business- but this isn’t necessarily true. Cash flow loans are a great example of a loan that often have a high acceptance rate, which is partially due to the loan size being based on a companies’ projected income. That means that there’s good ground for a lender to assume that loan repayments can be made- and the repayments are made fairly quickly- coming directly from a business’ income in subsequent months.

However, as cash flow loans are a form of short term funding, it’s important to understand that naturally they shouldn’t be considered a long term solution to cash flow issues. So, how do you know if they are the best option for your business?

To start with, you should understand why cash flow is important to a small business. Two of the main factors are that smaller businesses don’t tend to have the same level of financial backing or the opportunity to access alternative loans as easily.

How to calculate cash flow

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To understand your cash flow you need to work out:

(Cash + Income) – Expenditure = Cash Flow

You should also consider creating a cash flow forecast, which means using the above formula but with estimates for the future. Doing this will help you create an image of what the future looks like for your business, and assist you in creating a plan for the dryer seasons or unexpected changes in the economy.

Once you have managed your financial expectations and gained a clear understanding of your business’ finances, you might feel it necessary to enlist the assistance of a cash flow loan.

What are cash flow loans used for?

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The reason for acquiring a loan for cash flow purposes differs from case to case, but some of the most popular reasons include:

  • Being affected by seasonal trade
  • Looking to make an investment in a new venture
  • Preparing for busy periods in advance

Typically, using cash flow loans for small business involves tackling short-term issues that may have popped up unexpectedly, or proactively anticipating that your business is soon going to face a challenge.

Are there any downsides to cash flow loans?

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Potentially. If you’re taking out a loan that specifies cash flow as the primary use in your lending agreement, then the likelihood is that you’re only going to be taking out a relatively small amount compared to, say, taking out a loan to buy an expensive asset.

Smaller loan amounts may come with less favourable or flexible repayment options, which could mean that making repayments puts more short-term pressure on your business. An effective way to account for this could be to put together a water-tight business plan to boost your cash flow in a sustainable way.

An example of a cash flow loan

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Suppose that a small high-street barber shop is looking to expand their operations by purchasing new, cutting-edge technology. Perhaps the technology adds up to around £10,000 in total; they need to buy seats, scissors and drying equipment- and are in need of a loan.

An asset-based loan would mean that some high-value property owned by the business is used as an assurance that the loan will be paid off. However, small businesses such as our barbers are unlikely to have this type of asset. So, they may look to take out a cash flow loan; an unsecured loan that would enable them to pay back their £10,000 over a fixed amount of time agreed with the lender.

The benefit of an unsecured loan as opposed to an asset-based loan for the barbers would be that if they found themselves unable to pay off the loan, their business may unfortunately fail. However they wouldn’t lose, for example, their house. This means that, comparatively, there’s more risk for the lender with an unsecured loan.

If you’re requiring a loan for cash-flow purposes, and are a small or medium sized business, you can read more about our loan service below.

Our business loan service for SMEs

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There are a range of business finance solutions available for SMEs. Here at Esme, we offer online business loans which are designed for busy SMEs looking for quick business finance with competitive rates. Our business loans range from £10,000* to £250,000 and can be repaid over a 1 to 5 year time period- meaning you can choose a loan repayment plan that works for your business and its cash flow.

*From £25,500 for sole traders.

Before you apply for a loan with us, it’s important to ensure you meet the eligibility requirements below:

  • Over 18 years old and a UK resident and homeowner
  • Turnover of more than £50,000 per annum
  • You must be a sole trader or Director of a UK Limited company
  • Been actively trading for more than 3 years and a track record of making a profit

Our eligibility criteria can change from time to time but you can check our current criteria by clicking ‘Apply now’ on our website, or the ‘eligibility checker’ button below.

How could Esme help?

These are difficult times for many businesses, so it’s important now more than ever, to take good care of yourself and your team. If you’re concerned about your business being impacted financially due to coronavirus, visit our FAQ's page for information about how we may be able to support you.