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Updated: October 9th, 2023
When you need a small business loan to cover short-term expenses or invest in growth, your first question might be: will I need collateral?
For many business loans, the answer is yes but cash flow financing offers a collateral-free funding solution. Cash flow loans can offer quick and convenient financing to meet a variety of needs for your business.
The key feature of cash flow loans is that they don’t require you to offer the lender collateral to secure a loan. In other words, you don’t need to put any of your business or personal assets on the line to borrow money.
Cash flow financing is different from traditional bank or credit union business loans, in that it may be easier to get approved. This type of lending may be suited to newer businesses and business owners who are focused on growth, but may not be able to get other types of funding because of a poor credit history.
Asset-based lending represents another category of small business financing. The main differences between cash flow financing and asset-based lending lie in what a lender uses to determine eligibility for a loan and loan terms, if approved, and what the funding is used for.
With cash flow financing, the lender gauges your ability to repay a loan based on your future cash flow projections. In other words, whether you have assets on hand to repay a loan right now isn’t as important as whether you will have the necessary business cash flows in the future.
Cash flow lenders will take your personal and business credit scores into account, but the overall health of your business, your cash inflows and outflows, and your future revenue outlook matters more for cash flow financing. Collateral doesn’t figure anywhere into the picture. This type of financing can be used for virtually anything, but it’s more often associated with meeting short term or smaller funding needs, rather than long term investments in business growth.
With asset-based lending, lenders want to see that you have some skin in the game, so to speak. That’s what your collateral—which may be liquid assets, real estate, business equipment, inventory or accounts receivable—demonstrates. For example, if you need to buy some heavy equipment to grow your construction business, the equipment itself would be used as collateral.
Asset-based lending generally means less risk for the lender. If you default on an asset-based loan, the lender can take ownership of the collateral you used to secure it. This type of loan may have a more intensive approval and underwriting process, as lenders will need to review your credit, business financials and the estimated value of the assets you’re pledging as collateral.
Generally speaking, when you apply for cash flow financing the lender reviews the amount you’re asking for, then compares that to your cash flow projections and credit to determine if you’re eligible. You’d then pay the money back, with interest, according to the schedule set by the lender.
Cash flow loans can be funded quickly, in many cases in just a few business days. That’s convenient if you need funding for your business right away and you can’t wait several weeks for approval. In that sense, cash flow funding is virtually like any other kind of short-term funding. Once you take a closer look at the different types of cash flow loans, that’s where you’ll begin to see differences in terms of interest rates, loan fees, and repayment terms.
There are several reasons why you might consider a cash flow loan in lieu of another type of business financing. Some of the most common uses for cash flow loans include:
If you run a product-based business, empty shelves aren’t something you want to deal with. A cash flow loan could help you purchase the inventory you need to keep your customers happy and avoid sales dips.
When your business pays someone else to manufacture the products you sell, cash flow gaps can keep those products from making it into your customers’ hands. In that situation, you could use cash flow financing to fill a purchase order and keep your deliverables on schedule.
A cash flow loan is a good fit to help smooth out seasonal ups and downs in your cash flow. You could use a loan to cover the slower periods during the off season or get ready for the peak season by purchasing inventory or hiring and training new staff.
You may run an online business and decide to open a physical store. Or, you may run a brick-and-mortar operation and decide to open up a digital storefront. Either way, cash flow financing could give you the funding you need to pursue a new physical or virtual location.
Marketing is important for spreading the word about your business and widening your customer base. If you have a new product or service you’re planning to launch or you’re entering a new market medium, cash flow loans can help you cover your budget.
An out of the blue expense could throw you off track financially or put a pinch on your cash reserves. You can use cash flow financing to cover emergencies or other unforeseen costs without putting a strain on the business.
There’s more than one way to get cash flow financing. If you need a loan quickly, without having to offer collateral, here are five options to consider:
Business term loans are called that because you’re borrowing money and paying it back over a fixed term. A short-term loan typically has a repayment term of 12 months or less, though some may extend it a little longer.
Short-term loans can help you meet short-term needs, such as paying taxes or insurance premiums, hiring new staff or meeting payroll for the month. Loans can be repaid monthly, weekly or even daily, depending on the lender.
When considering short-term loans, look at the minimum and maximum loan amounts to understand whether you’ll be able to borrow enough to meet your needs. Also, take a look at the interest rates, fees and minimum requirements to qualify.
A business line of credit is a little different than a term loan. Instead of getting a lump sum of funding, you can draw against your credit line as needed, only paying interest on what you use.
Business lines of credit can be unsecured, meaning you won’t need collateral. But, a line of credit may be more difficult to qualify for compared to other cash flow financing options, as lenders tend to look for strong credit and financials from borrowers.
Invoice financing or invoice factoring is a way to leverage your outstanding accounts receivable for a loan. The lender reviews your accounts receivable to see what’s owed, then uses that to determine a loan amount.
Depending on how the lender structures loans, you may be given a lump sum of funding which is then repaid when your receivables are paid. Some lenders may take over collection of those receivables for you. Either way, it’s a path to getting funding quickly when you need it.
One thing to know about invoice financing is that you may not be charged an annual percentage rate. Instead, you’ll pay a factor rate to borrow. This factor rate is multiplied by the loan amount to determine the total you’ll have to repay. The lender takes this fee off the top once the invoices are paid.
A merchant cash advance is similar to invoice financing in many ways. It’s designed to be short-term financing and instead of an APR, you’re charged a factor rate or factor fee. You don’t need perfect credit or a lengthy time in business to qualify.
The difference is that a merchant cash advance lender looks at your credit card receipts as qualification for a loan. What you can borrow is determined by those receipts and financing is repaid daily or weekly from future credit card sales.
Merchant cash advances can put money in your hands in just a few business days but it’s important to be mindful of the factor rate. Depending on how much you borrow, the factor rate and how long it takes you to repay the financing, the fee can easily be equivalent to a double- or triple-digit effective APR.
An unsecured small business credit card is another no-collateral option for funding your business. Depending on the card, you may be able to unlock a generous spending limit plus extra perks such as rewards on purchases, discounts on business services or premium travel benefits.
Your personal credit score is the main factor used to qualify you for a small business credit card, though the card issuer will also look at your business and personal financials. Keep in mind that you’ll likely have to sign a personal guarantee to get a business credit card. This guarantee makes you personally liable for any debt you incur on behalf of the business.
If you have time to spare for getting business funding, there are some other options you may consider.
A traditional term loan could be one option. With a traditional term loan, you may have five years or more to repay what you borrow. Term loans may be secured or unsecured, depending on what you need to borrow and what you’re using the loan for. You can find term loans through banks, credit unions and online lenders.
There’s also the Small Business Administration. The SBA doesn’t make loans directly but it does guarantee business loans granted through partner lenders.
There are several SBA loan programs to choose from but the most popular is the 7(a) program. Eligible businesses can borrow up to $5 million and rates are competitive. Personal guarantees and down payments are required for 7(a) loans. Lenders are also required to obtain collateral for loans if possible, though not having collateral isn’t necessarily an obstacle to getting a loan.
One more option is equipment financing. This type of loan is specifically designed to help you purchase business equipment. The equipment is your collateral and it’s possible to have the loan terms structured to fit the equipment’s lifespan.
As a business owner, you might be wearing twelve different hats on any given day, and you can’t afford to stop and wait on client payments. Funding Circle is here to deliver the cash flow financing options you need quickly, so you can focus on what’s important – growing your business.
You can apply for a loan in just 10 minutes, and get the money in your bank account in as few as 5 days. Rates are competitive, with borrowing limits up to $500,000 and terms ranging from 6 months to 5 years.
Whatever financing need you have, we want to help fill it. Apply today to get your personalized quote!
Why should I borrow from Funding Circle as opposed to a bank or other lender?
Do you offer cash flow financing for startups?
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Do I need to have collateral, and if so, what would be acceptable collateral for a Funding Circle loan?
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.