Small business cash flow loans: how to get fast funding

Cash flow constraints can stunt any company, whether you’re trying to invest, expand, or run the business day to day. With very few exceptions, you simply can’t succeed without a healthy, efficient flow of funds. 

In the past, that might have been the end of the story. But today, there are a wide range of options to access cash and keep the wheels in motion. 

A cash flow loan is just the thing to get you through when cash is in short supply. But what is this type of financing, and how does it work? What categories of cash loans are offered by banks? And what new solutions do fintechs offer businesses?

We answer all these questions to help you achieve better day-to-day financial management.

What is a business cash flow loan?

When your company is short of cash, you face financial difficulty to pay debts, make new purchases, increase stocks, and more. A business cash flow loan provides a solution to this tight situation.

Small business cash flow loan: definition

A cash flow loan is money borrowed from a financial institution to cover cash flow shortfalls. It can take many forms, and the specific terms and conditions agreed when you sign it will determine how much you borrow and how soon you must repay.

We focus on small businesses here because these are most commonly affected by acute cash flow shortages. A slow week, a seasonal slump, or one or two late customer payments can make an enormous impact.

Objectives of a short-term loan for SMBs

A cash flow loan is used for operating rather than capital expenditure. It is most commonly used to cover all or part of a company's short-term working capital requirements.

This cash is sometimes used to finance peaks in demand, for example for a sales campaign or seasonal spike. It’s a loan or advance that the company can draw on from time to time, depending on its cash flow forecasts. 

Used properly, cash flow loans are the ultimate tool for optimizing working capital.

How cash flow loans work

To obtain a business cash flow loan, you’ll need a financing dossier and application. Even if a business loan application for cash flow is lighter than one for long-term investments, the process takes time. It requires forethought to assemble the documents and justify your needs to the bank. And you’ll need a compelling narrative.

In most cases, a conventional cash loan involves a contract between the lender and the borrower. This contract sets out the conditions of the loan, the amount, the duration, and the cost (including interest rate and administration fees). It also sets out the terms and conditions for repayment in one or more instalments. The maximum term of a short-term loan is typically two years.

In some specific situations, it may be combined with a transaction known as assignment of receivables. Here, a company issues a sales invoice and awaits payment from its customer. It assigns its receivable to the organisation paying the financial advance. This system is used in classic factoring arrangements. 

Types of cash flow loans for SMBs

Cash flow financing solutions fall into three main categories: credit lines, short-term loans, and receivables financing.

Credit & overdrafts

This type of cash flow loan comprises two very distinct types of financing: 

• A line of credit or authorised bank overdraft: this is a line of credit on which the company can draw freely for the duration agreed in the contract. You have the freedom to use it as you need, provided you stay within the agreed criteria.
• Temporary overdraft: the bank agrees to a one-off, temporary debit balance. This type of financing usually comes with very high costs and far less flexibility.

In the vast majority of cases, a credit line is the favourable choice for small businesses. 

Short-term business loans

These loans are best thought of as fit for a single purpose — to borrow and use to achieve a set goal. Again, this could be to meet seasonal peaks, or to survive a particularly slow period. It could also be for promotion, marketing, or advertising costs for a one-off campaign. 

While a range of providers offer short-term financing, traditional banks may be cautious. The time taken to apply and secure the loan can also be far too long to actually be practical. That’s where fintechs like Defacto have fit in, to offer faster, more flexible financing.

Short-term loans can also include instruments like commercial paper. These are negotiable debt securities where a company issues a note for a maximum period of one year and the bank buys it. The bank pays the cash in return.

We won’t go into further detail on commercial paper, but it does exist as a possible option. 

Receivables & payables financing

Here we have a wider category including advances linked to customer or supplier invoices — receivables and payables.

Invoice discounting

Not to be confused with early payment discounts, this is where you secure a loan using outstanding customer invoices as collateral. A lender gives you the cash upfront, and you pay back this loan once your customer pays with. 

In effect, you shorten your “days sales outstanding” (DSO) and can use future cash flow today. Just check that the fees and interest aren’t too cumbersome. 

Invoices factoring

There are two types of cash flow loan to consider here: 

• Transfer of customer invoices to a factoring company. This organisation, known as a factor, pays you a financial advance, minus a deduction to cover the guarantee fund.
• Transfer of supplier invoices, also known as “reverse factoring.” With this solution, you ask a third party to pay your supplier, which leaves you more cash available in the immediate term. You then reimburse the factor at a later date.

Inventory financing

If you need cash specifically to buy products and increase stock, look into inventory financing. Here, you get a loan to purchase goods, using those same goods as collateral. This type of loan can be obtained from banks, but new solutions are available from modern financial organisations.

Cash flow financing solutions offered by Defacto

As a fintech and the first licensed B2B lender in France, Defacto offers a whole range of innovative, fast and flexible cash flow solutions for businesses. These advances or short-term loans are specifically designed to help you grow. 

Faster small business loans

The two biggest hurdles to securing small business funding are time and administrative cost. It can take three months or more to get a bank loan. And much of this driven by the amount of paperwork and back and forth required. 

For this reason, too many small businesses are left out altogether. 

On average, we need just 27 seconds to analyse your business and create a loan facility. In just a few clicks, you can connect your own management, accounting, bank account and invoicing solutions. Defacto then reviews the same documents and data you would otherwise take weeks to compile. 

This service gets more efficient and effective every day. You no longer have to look months ahead to obtain cash credit for your business. We don't require a business plan or several balance sheets before making a decision. Our short-term credit solutions give you maximum flexibility.

Cash loans to pay suppliers and buy stock

Defacto helps you maintain good relations with suppliers. We pay your invoices for you up front, and give you the time you need to pay us back. We also finance inventory, which gives you more stock to increase sales. 

Even if you’re short on cash, you can still grow.

Financing customer invoices before their due date

Defacto can also help you overcome the customer payment delays holding you back. We advance you the money before the due date, covering part of the working capital requirement. 

Get the money you need today, without the delay.

Get a line of credit to unblock your cash flow

In addition to the short-term loan solutions offered by traditional banks and factoring companies, the range of possibilities has expanded thanks to fintechs. Whatever their situation, businesses now have no reason to put their foot on the brake and restrict their sales growth. 

You can obtain finance from a bank or a fintech financial institution, whichever helps you achieve your most pressing goals.

Want to see for yourself? It takes just a few clicks to check your eligibility and find out how much your company can borrow.