What is a Cash Flow Loan?

A cash flow loan provides a temporary influx of cash in order to meet current demands on a business. These demands may arise due to a slow sales cycle, the need for expansion or even delayed payments on a sale. The loan is secured against future cash inflows to the business. Basically, the business is able to get money because they use their future cash as collateral.

When to Take a Cash Flow Loan

Seasonal businesses are good candidates for cash flow loans. They may be unable to pay employees during the very slow months of the off season, but know profits will spike in the near future. For example, a school supply store may take a cash flow loan in January, and then repay the loan after the back to school season in August.

Risks of a Cash Flow Loan

The main risk of a cash flow loan arises if the loans are being taken too frequently. All businesses need some help through debt financing from time to time. However, when a business constantly relies on debt, rather than looking to earnings in order to fund salaries, growth and other efforts, the business is at risk of going bankrupt as soon as it cannot repay one of the loans.