Written byA cashflow loan is short-term business finance assessed on your recent trading cashflow and receivables rather than pledged assets, covering payroll, supplier bills or stock before customer payments arrive.
Also known as: cash flow loan, business cashflow financing
Key points
- Common uses include paying staff while waiting on customer payments, buying stock in bulk to secure a discount, and smoothing seasonal dips in sales.
- Options range from invoice discounting and factoring to business overdrafts, lines of credit, unsecured short-term loans and merchant cash advances.
- Lenders look at near-term cash conversion, such as aged receivables and recent sales, so set-up is often quicker than for long-term loans.
- Compare offers on total cost over the same period, including establishment, ongoing, transaction and exit fees, not just the headline rate.
How a cashflow loan works
Lenders underwrite cashflow finance in different ways, but the mechanics share common elements. You either draw a lump sum and repay it over a short fixed schedule, or you get a committed limit you can draw, repay and redraw, as with a line of credit. A merchant cash advance collects automatically from daily card takings, and with invoice finance your unpaid invoices become the lending asset: the lender advances a percentage of their value and pays you the balance, less its fee, once the customer pays.
Security ranges from none, which usually costs more, to charges over receivables or stock registered on the PPSR, often with a personal guarantee from directors. Because the lender is looking at near-term cash conversion rather than a long asset history, these facilities are usually quicker to set up than a long-term business loan.
Types of cashflow loan
Invoice finance suits businesses with large receivable balances owed by creditworthy customers; the invoices are the primary security. A business overdraft or line of credit handles small, intermittent shortfalls and day-to-day liquidity, with interest charged only on what you have drawn.
An unsecured loan gives quick access to smaller amounts without pledging assets, at a higher cost. A merchant cash advance suits businesses with high card sales, charges a factor rate instead of interest and can be very expensive once annualised. Supplier finance, or reverse factoring, has a third party pay your supplier early while you repay the financier later.
Costs, tax and what to compare
The headline rate is rarely the whole cost. Watch for establishment fees, ongoing or commitment fees for keeping a facility available, per-draw or per-invoice transaction fees, and early exit fees. Short-term charges can inflate the annualised cost well beyond the headline rate, so convert every offer to a common period before comparing.
Interest on business borrowing is generally deductible, and GST reporting for invoice finance depends on whether invoices are assigned or sold, so check with your accountant or the ATO. Lenders commonly ask for an active ABN and trading history, recent BAS and bank statements, an aged receivables ledger and business financials.
Example
A wholesale business has $150,000 of customer invoices on 60-day terms and needs $75,000 to cover payroll before those invoices are paid. An invoice finance facility that advances 80% of eligible invoices would make up to $120,000 available, with the lender paying the balance less its fee once customers settle. The alternative is an unsecured short-term loan for the $75,000 with an establishment fee on top of interest. Which is cheaper depends on the fees over the 60 days, so the business converts both offers to a total cost for the period before choosing.
Not to be confused with
- Term loan
- a term loan pays down over a fixed schedule, while a cashflow facility is often revolving or tied to invoices
- Invoice discounting
- one type of cashflow finance where your invoices are the lending asset and you keep collecting from customers
- Working capital loan
- a working capital loan is a set amount drawn and repaid on a fixed schedule, whereas a cashflow facility is usually revolving or sized from your invoices and card sales
Frequently asked questions
How does a cashflow loan work?
You borrow against your near-term cash conversion rather than long-term assets. Depending on the facility you draw a lump sum and repay it over a short schedule, draw and redraw within a limit, or receive an advance against unpaid invoices that the lender settles when your customers pay. Fees usually apply on top of interest.
How much does a cashflow loan cost?
It varies widely by product. Overdrafts and lines of credit charge interest on the drawn balance plus fees, invoice finance charges a fee per invoice period, and merchant cash advances use a factor rate that can be very expensive once annualised. Convert every offer to a total cost over the same period before comparing.
Can a startup get a cashflow loan?
Sometimes. Most lenders want an active ABN, trading history and a minimum turnover, but some will consider a new business with strong purchase orders, contracts or card sales. Expect a higher cost or tighter terms than an established business would be offered.
What security do lenders ask for on a cashflow loan?
It depends on the product. Unsecured short-term loans may need no asset security but cost more. Invoice finance uses the invoices themselves, often with a PPSR registration. Overdrafts and lines of credit are usually backed by business assets or a charge over accounts, and lenders commonly ask directors to sign personally.
Is interest on a cashflow loan tax deductible?
Generally yes, where the money is borrowed for business purposes. GST reporting for invoice finance depends on whether the invoices are assigned or sold. Confirm the treatment for your situation with your accountant or the ATO before you rely on a deduction.
Related terms
Broader term: Working capital
Working capital
Working capital is the difference between a business's current assets and current liabilities: the measure of whether it has enough liquid resources to meet obligations due within 12 months.
Read definitionWorking capital loan
A working capital loan is short-term business finance that funds day-to-day operations, such as payroll, stock and supplier bills, rather than long-term capital purchases.
Read definitionInvoice discounting
Invoice discounting is a working capital facility where a lender advances most of an unpaid invoice's value and holds a reserve until your customer pays.
Read definitionFactoring
Factoring is a finance arrangement where a business sells or assigns its unpaid invoices to a specialist lender, the factor, for an immediate cash advance and outsourced collections.
Read definitionLine of credit
A line of credit is a revolving credit facility with an approved limit that you can draw, repay and redraw, paying interest only on the drawn balance.
Read definitionOverdraft
An overdraft is a short-term credit facility attached to a transaction account that lets you spend past your available balance up to an agreed limit.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.