Cash flow is the monetary movement in and out of a business, in form of receiving and expenditure of money in a certain project or a business deal. In other words, cash flow defines the money left after the subtracting amount given out as payments from the amount that is to be received after successful completion of a project.
Cash flow finance, also known as cash-flow loan is the debt given by some financiers, depending on the value of expected cash flows of the borrower company. Here no collateral is needed from the company for approving the loan. The repayment period also depends on the schedules of that company’s projected cash flows shown to be in future. Cash flow enables a company to meet all its expenses and pay its bills, for completing a special project. So this type of loan maintains and also improves the cash flow of the company. The loan agreement depends on the sufficient growth of the levels of income before paying interests, taxes, regularly paying off the debt, and depreciation of the value of the loan. These loan financiers also look whether the interest level is manageable by the borrower company.
Loans may be of various maturity durations, from 3 months to 3 years, depending on the purpose of taking each loan, but generally these short term loans are taken for maximum up to 6 months of duration. The loan amount can vary from $10,000 to $1,00,000, given out for good business reasons. This loan is mainly taken by the companies to fund their projects or make some important purchases for their business purpose. The financier is given a part of the money received by the borrower company, at the end of their project or sales. An agreement is duly signed by both the parties in this regard.
Therefore the companies can use this borrowed capital to keep their usual cash flow, in spite of meeting the extra expenses of a project or a sales order. This loan is a temporary solution to the regular financial expense problems, raised due to a sudden business demand; but if the problem continues for a long time, then it is better to find a permanent solution to this persistent economic problem by improvement of their cash conversion cycle and asking their regular customers to pay them faster. The cash flow of a company should always be monitored very carefully through the cash-flow statement, which is a mandatory report to be maintained by all companies and checked by all investors and financiers by giving any financial support to these companies.
Any financier will check the financial background of the borrower company and its cash flow record and the track record of earlier debt payments, before the short term loan sanction to that company. Generally the banks do not ask for any collateral, if the business owner’s personal credit record is good enough to approve the loan. But other financiers may ask for security like a property or any assets, depending on the value of which they can lend the capital amount. This short term loan has higher interest rates, though fixed, than the longer term ones; still it is better to ask for short terms as total interests cost much less.