Cash flow asset finance is a type of unsecured business loan that lenders gauge your ability to repay the debt based on projected future cash flows. This differs from other types of loans that are underwritten based on actual physical assets like property or inventory.
Understanding and managing your company’s cash position is essential for a successful business. Especially during times of change, knowing how to adapt is crucial.
What is cash flow?
Cash flow is the movement of money in and out of a business over time. It's an essential part of understanding your business's financial health and is used to forecast future profitability.
Managing your accounts payable (what you owe to vendors) and knowing when bills are due is important for keeping your cash flowing. But so is identifying when you may need more cash than you have on hand. That’s where calculating different versions of cash flow comes in handy, such as levered free cash flow (FCF) and operating cash flow.
Unlike more traditional loans, cash flow finance does not require collateral in the form of physical assets like equipment or property. Instead, lenders assess your current and projected cash inflows and outflows. This enables them to make lending decisions quickly and efficiently. To ensure your ability to repay, some lenders may ask for a personal guarantee. Whether that's necessary will depend on your current and anticipated cash flow.
Why do I need cash flow?
Managing cash flow is important for every business because it allows you to see how much profit your business is making in a given period compared to how much cash is going out. This information helps you plan for the future, make informed decisions and take advantage of new opportunities as they arise.
It also ensures that you have enough cash to settle your bills, invest in growth and meet your other financial obligations. Insufficient cash can lead to financial strain, reduced profitability and even the closure of a business.
A good cash flow forecast enables you to plan and budget your expenditure so that your income is higher than your expenses. It’s also a useful tool for negotiating with suppliers and customers as it shows how committed you are to ensuring payments are made on time, helping to build trust and loyalty. It can also help you set clear financial goals for your business based on real-time cash forecasts, giving you confidence to flex your plans when necessary.
How can I improve my cash flow?
Healthy cash flow can help you avoid costly mistakes, make more profitable investments and stay on track to achieve your business goals. Boosting your cash flow could be as simple as offering customers early payment discounts, setting clear payment terms and projecting completion dates in invoices or switching to Direct Debit to collect one-off and recurring payments more reliably.
Other factors that can impact cash flow include unnecessary expenses, poor planning and over-spending on non-essential products or services that won’t bring in enough returns. Uncontrolled expansion can also eat into your cash and lead to debt problems down the line.
To improve your cash flow, combine strategies that boost revenue with those that reduce costs. For example, increase sales, offer discounts for prompt payment, invest in technology to optimise accounts receivable, improve inventory and reduce waste, or negotiate with suppliers to pay less up front. You can also use cloud accounting to gain real-time visibility of your financials and cash flow.
How can I raise cash?
Business owners can use a variety of methods to raise cash. They can sell assets, invest equity capital or obtain a working capital loan. These loans usually don’t require any collateral and have lower interest rates than payday or credit card debt.
The bottom line is that even profitable companies can run into financial trouble if they don’t manage cash flow effectively. It’s essential to understand what causes cash flow problems and how to correct them.
One common mistake is overestimating profits. This can lead to spending more than a company has in the bank and leaving little room for emergencies. Another mistake is delaying payments to vendors. Many businesses can improve their cash flow by offering early payment discounts or setting up ACH or credit card payments, which will reduce the time it takes for a vendor to receive money. Another option is pooling funds from several businesses to negotiate better prices with suppliers, which is known as power in numbers.