A Guide to Loan Financing When Your Cash Flow Dries Up


If a tough stretch of business has you scared to check your bank account, you’re definitely not alone. An Intuit QuickBooks survey found that 69% of business owners lose sleep over cash flow concerns. The report also found that business owners with cash flow struggles fall behind on payroll, lose opportunities for projects or sales, and miss deadlines for vendor and loan financing payments.

Running a business is anything but predictable, and you can run into cash flow problems for a number of reasons:

  • Customers are slow on paying their invoices.
  • You run into a slower-than-expected sales stretch.
  • You made some key business investments that used up most of your cash.
  • Your equipment breaks down and needs emergency repairs.

Even a highly profitable business can see its cash flow dry up due to unfortunate timing. For example, Steve runs a construction firm that has been expanding rapidly. He just hired two new employees and bought a new bulldozer as he expects to land several lucrative jobs in the near future.

But in the meantime, his biggest client just missed the final payment on their project and Steve may need to take legal action. Even worse, his truck broke down and needed a costly repair. Even though Steve’s accounting statements show him well in the green, his bank account is dipping dangerously low. And payroll is just around the corner …

In times like these, it’s OK to ask for help. Small business financing can help you borrow money quickly to cover operating expenses until sales pick up. While taking on debt may seem like a step back, it’s often a necessary part of running a business. Whether your business is in the middle of a cash flow crunch or you just want to prepare for the future, this guide is for you. We cover the different types of small business financing, as well as the best ways to manage your loan funding.

What Is Small Business Financing?

When you’re running short on cash and don’t have time to spend on a lengthy loan application, there are a few small business financing options that can get you money quickly.

Small business loans from an alternative lender

For fast loans, traditional lenders are not a practical solution. They often have lengthy application processes and there’s a chance of rejection. Another route is to work with alternative or online lenders. These companies set up small business loans that they can approve and payout in as little as 24 hours. Their small business loans range from $5,000 to $500,000 — smaller than the maximums on traditional loans but still a reasonable borrowing limit.

Equipment financing and leasing

If your business needs money to buy a new piece of equipment or to replace a broken asset, equipment financing and leasing are good options. Equipment loans are similar to cash flow loans in that they are usually approved more quickly and easily than a traditional loan. The main difference is you can only use the funds to buy a piece of equipment. Equipment leasing lets you try out a piece of equipment without paying a large sum upfront. Business owners who like to continually upgrade to the newest tech often appreciate the flexibility of a lease.

Line of credit

A line of credit lets you borrow at your convenience. The lender sets your credit limit and then you can borrow, pay off the debt, and borrow again when you need it. But you need to qualify for the line of credit first before you can use it. You typically get a line of credit from a traditional lender, which means a longer application process. A line of credit might not be able to solve your cash flow troubles today, but it’s something you could consider for the future.

Small Business Administration (SBA) Express loans

With SBA Express loans, you borrow either a lump sum or set up a line of credit. They’re called Express loans because the SBA gives you a decision on your application within 36 hours. You get the decision quickly, but not the actual money. The lending company that actually funds the loan may take anywhere from 30 to 90 days to process it.

Invoice factoring

If your clients are slow on paying their bills, invoice factoring can speed up your payment. The company offering the service, known as the factor, gives you a percentage of your unpaid invoice upfront. Then, they take on the effort and risk of collecting payment from your client. Once the client pays the invoice, the factor will send you the rest of the money minus a fee, typically 2% to 6% of the invoice amount.

Knowing all these options can help you come up with your loan financing plan. For instance, Ellen is the owner of a medical device company. She recently made a large sale to the local hospital but is waiting on payment for a $50,000 invoice. Her cash is dwindling right when she needs to restock inventory.

She doesn’t have time to wait for the SBA or to set up a line of credit. Though she could factor the invoice, she believes the hospital will pay shortly, and she’d much rather collect everything she’s earned rather than spending $1,000 or more on the factoring fee. Instead, she uses a cash flow loan from an alternative lender. At the same time, she applies for a line of credit to help her borrow in the future.

Young farmers were able to overcome a bad crop thanks to loan financing

7 Benefits of Small Business Financing

Small business loans from alternative lenders have several advantages compared to traditional lenders, which is why they can be a better fit when your cash flow dries up.

1. A quick and easy application

Alternative lenders typically offer a much faster loan financing application process. They may simply ask you to fill out an online application, explaining what your business does and why it needs cash. You’ll also need to submit your bank statements from the past few months. That’s it.

Traditional lenders have a more extensive process and may ask to see a formal business plan, proof of collateral, your credit report, your tax returns, a market and sales strategy for how you’ll use the money, and the legal documents for your business.

2. Fast loan funding

Since alternative lenders aren’t going over a massive pile of documents, they can decide on your loan application quickly. You could have your loan approved and paid out within 24 hours of your application. Traditional lenders often take several weeks or months before they approve a loan.

3. Flexible with credit scores

Alternative lenders are less concerned about your credit score. Their decision is more based on whether your business has been earning revenue to pay off the loan. Traditional lenders have tougher standards so you often need excellent credit to qualify.

4. No prepayment penalties

You can pay off a loan from an alternative lender as early as you want without owing a penalty. Traditional lenders typically charge a penalty when you pay early, like 3% of the loan amount if you pay within five years. Since it took them so long to set up the loan, they need to collect a minimum amount of interest and fees to justify the work.

5. Daily repayment schedule

Traditional small business loans use a monthly payment schedule, where you owe a large lump sum on the payment deadline. Alternative cash flow loans may follow a daily repayment schedule, where you cover a little each day as you bring in revenue. Daily payments are easier to budget because you won’t reach the end of the month and realize you’re short of the large lump sum payment.

6. Short-term nature

By design, small business loans from alternative lenders are meant to last for a shorter amount of time than traditional loans. You get money quickly to cover your cash flow needs and then pay it back quickly as well. This gets your business out of debt sooner.

Another reason to pay off these loans early is because they may have a higher interest rate than traditional loans. However, by paying the loan off quickly, you could end up owing less in total interest than if you took out a long-term traditional loan.

7. Smaller loan amounts available

With an alternative lender, you can take out business loans as low as $5,000. Traditional lenders may not offer these smaller business loans because they don’t justify the work of their application process.

5 Ways to Use Small Business Financing

So now you know how to get a small business loan. What are some ways to put that money to good use?

1. Handle cash flow problems

If your cash flow dries up or you deal with an unexpected emergency, short-term cash flow loans can keep you going. Ideally, you would have your own emergency fund (at least two months of operating expenses) to cover these costs. But if you haven’t built up these savings, a cash flow loan can be your backup.

2. Provide working capital

Your operating expenses continue week after week, even if your sales are in a dry spell. Alternative cash flow loans give you the money needed to make payroll, cover your utilities and other bills, and pay your vendors so your business can continue running.

3. Restock inventory

There can be a lengthy gap between when you make a sale and when you get paid, but during this time you still need to resupply. Cash flow loans let you restock inventory so you’re ready for the next sale.

4. Upgrade and replace equipment

If a key piece of equipment breaks down, equipment financing lets you purchase a replacement or an upgrade with no money down. The lender also helps you negotiate for the best price and qualify for the maximum possible tax benefit as the result of your investment.

5. Protect your business and personal finances

Above all, small business financing keeps both your business and your personal finances safe. On the business side, you won’t have to raise cash by selling shares of your business to other investors, which can mean losing control of your company. You also won’t be forced to dip into your personal savings or retirement plan to meet your business needs.

For example, Sebastian owns a farm that just suffered a moderate crop failure. He needs to repurchase seeds, pay his staff and keep up with equipment maintenance, but only has enough cash to cover two of the three goals. He thought about tapping into his 401(k), but realized that would lead to taxes and a 10% early withdrawal penalty on every dollar taken out. Instead, he uses a small business loan to get through this stretch and will use strategies to better manage cash flow next time around.

When It’s Worth Taking Out a Loan

Figuring out whether your small business should borrow depends on your personal situation, but these scenarios are good examples of when it makes sense.

During a cash flow emergency

When your cash flow dries up and you need help covering bills, this is the moment to reach out for loan financing. Your employees and your business are counting on you.

When you have a gap in funding

Other small business financing options take time to set up, like qualifying for an SBA or traditional loan and bringing on investors. You could use an alternative loan to cover what you need during this gap and then pay off the short-term loan once you get the funds from your other sources of financing.

When you’re confident you can pay the money back

Before you borrow, make sure it’s an amount you’ll be able to safely pay back. The loan specialist will help you analyze your financial situation to make sure you borrow an appropriate amount, as they want to ensure you can pay off the debt as well.

When you have a clear strategy for investing the loan

Borrowing money has a cost: the loan interest rate. If you’re going to use business loan financing, make sure there’s a clear upside where you will gain more than you pay for the debt. Buying new equipment, covering your operating expenses, making payroll, and investing in marketing are all good strategies for using a loan. Your accountant can run an investment analysis to help you decide which uses will yield the best return.

When the cost of doing nothing is higher

While there is a cost to borrowing money, there is also a cost to not investing in your business: the cost of doing nothing. On average, small business owners have lost $43,394 because they didn’t have the cash to move forward on a project or sale, according to the Intuit QuickBooks survey. Not having the money to properly operate your business can be much more expensive than taking out a loan.

The cash flow roller coaster is a stressful but unavoidable part of running a business. But by properly using your financing options and working with a lender that understands your industry, you can avoid the sleepless nights that plague the typical small business owner worried about cash.

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