What is cashflow finance and how is it different from a property-backed loan?

Most business lending falls into two broad groups. Property-backed (secured) lending relies mainly on the value of an asset, usually real estate, that the lender can sell if you do not repay. Cashflow finance relies mainly on the income your business earns. The lender asks: does enough money come through this business, reliably enough, to meet the repayments?

Our guide to secured vs unsecured business loans compares the two approaches side by side. This article looks more closely at cashflow finance: the products, how lenders assess you and the risks.

Main types of cashflow finance

Unsecured term loans

You borrow a lump sum and repay it over a fixed term, often shorter than a property-backed loan. Repayments are commonly daily, weekly or fortnightly. The loan amount is usually linked to your turnover. These loans often suit a one-off need, such as a fit-out, a stock purchase or a short-term opportunity.

Business lines of credit

You get an approved limit you can draw, repay and redraw. business.gov.au describes a line of credit as “an agreement that lets a borrower withdraw money from an account up to an approved limit.” It suits uneven or recurring needs. See line of credit vs term loan to decide between the two.

Merchant cash advances

A provider advances a lump sum in return for a share of your future card or online sales. Repayments are taken automatically, either as a percentage of each day’s card takings or as fixed regular debits. When sales are slow, a percentage-based repayment falls, which can help. But the cost is often set as a fixed amount agreed at the start rather than as an interest rate, which makes it harder to compare with a loan. It is most relevant to businesses with high card sales, such as retail and hospitality.

Invoice finance

A provider advances cash against invoices you have issued to business customers and is repaid when those customers pay. Your receivables, not property, are the main security. See what is invoice finance.

What cashflow lenders assess

Each lender has its own credit policy, but most look at similar things. Our guide on how lenders assess business loans covers the full process.

• Bank statements. These are central. Lenders read recent business account statements, often through a secure data connection, to see deposits, regular outgoings, the lowest balances, dishonoured payments and any other lenders’ repayments.
• Turnover. Many lenders set a minimum monthly or annual turnover. The amount they will lend is often linked to it.
• Time trading. Lenders usually want a minimum trading history under your current ABN. Newer businesses may have fewer options.
• Existing debts. Lenders check other loans and repayments already coming out of your account, including any tax debts.
• Credit history. Lenders check the business’s credit file and usually the directors’ personal credit files too.
• Industry and purpose. Some industries are riskier for lenders, and a clear purpose helps.

For larger amounts or longer terms, lenders may also ask for financial statements, tax returns and other documents. See how to prepare for a finance application.

The risks to weigh

Frequent repayments

Daily or weekly repayments come out of your account whether or not customers have paid you that week. In a slow week, a missed or dishonoured repayment can add fees and put pressure on your other bills. Map the repayments against your real cash flow, including quiet months, before you commit. Our guide to how business loan repayments work shows how the frequency changes what you pay each time.

Total cost

business.gov.au notes that non-bank lenders often have more flexible criteria than banks but may charge higher interest rates and fees. Cashflow finance carries more risk for the lender than property-backed lending, and that is usually reflected in the price. Compare:

• the total amount you will repay, not just the repayment per period
• establishment, account and early repayment fees
• whether the cost is quoted as an interest rate, a fixed fee or a factor amount, and convert each into total dollars so you can compare like with like

Personal guarantees and security

Even “unsecured” loans are usually backed by a personal guarantee from the directors, and some lenders also register a general security interest over business assets. Moneysmart warns that a guarantor “may have to repay all of it” if the borrower cannot, and says that if you are asked to guarantee a business loan you should read the loan contract with extra care. Get independent advice before you sign.

Stacking

Taking out a second or third cashflow loan to cover repayments on the first is a warning sign. If you find yourself doing this, stop and get advice. The Small Business Debt Helpline (1800 413 828) is a free service run by qualified financial counsellors for small business owners in financial difficulty.

When cashflow finance may not be the answer

business.gov.au suggests that businesses in debt difficulty assess their situation, get professional guidance, prioritise debts, chase money they are owed and talk to creditors about payment plans. If the cash shortfall comes from ongoing losses, a tax debt or falling sales, new debt may only delay the problem. Read when borrowing is not the answer and speak with your accountant first.

Step by step

1. Define the need. Write down how much you need, what it is for and how long you need it.
2. Check affordability. Build a simple cash flow forecast that includes the new repayments at the frequency the lender uses.
3. Match the product to the need. Use a term loan for a one-off cost, a line of credit for recurring gaps, invoice finance for slow-paying business customers, and consider a merchant cash advance only if card sales are your main income.
4. Prepare your documents. Get recent bank statements, ABN and ID details, and any financial statements ready.
5. Compare the total cost in dollars. Ask each lender for the total repayable and all fees.
6. Read the guarantee and security terms. Get independent legal or financial advice if you are giving a personal guarantee.
7. Check the lender is real. business.gov.au warns that real lenders do not offer pre-approved loans through unsolicited calls or emails. Check ASIC’s registers if you are unsure.

Important things to know

• Speed can cost more. Fast approval is convenient but is not a reason to skip comparing the total cost.
• Repayment frequency changes your cash flow, not just the cost. A loan you can afford monthly may be hard to manage daily.
• “Unsecured” rarely means no risk to you. Most loans come with a personal guarantee.
• Your bank statements tell the story. Dishonours, overdrawn days and many other lenders’ repayments can reduce what you are offered.
• Talk to your accountant about whether cashflow finance fits your situation and how the repayments and interest will be treated for tax.

Compare cashflow loans, working capital finance and business loans when you are ready.