Mike Hennessy spoke with LendingTree for this April 2020 article "Cash Flow Financing: How Cash Flow Loans Work and Where to Find Them." Because of the flexible requirements, cash flow financing — which can include short-term loans, lines of credit, and merchant cash advances — may be easier to get for some business owners than other forms of financing, like traditional bank loans. However, cash flow loans can come at a high cost.
Cash flow financing was a byproduct of the financial crisis in 2008. Banks reduced business lending, leaving many small businesses without stable funding sources, said Mike Hennessy, founder and CEO of financial advisory firm Harbor Crest Wealth Advisors in Fort Lauderdale, Florida. These lenders typically have an automated underwriting process that is faster than bank processes. But in exchange for fast funding with fewer requirements, borrowers may pay higher interest rates and fees.
Before applying for a cash flow loan, ask yourself why your business needs the money. If you can point to a specific revenue growth opportunity that cash flow financing would support, then it may be worthwhile, Hennessy said. However, if you’re short on cash and aren’t sure why, you may want to avoid borrowing money at a high cost. You would risk putting your business and personal financing at risk if you can’t pinpoint why the business funds are running low.
“While unforeseen emergencies can always crop up and are nearly impossible to completely mitigate, businesses that don’t project different cash flow scenarios or fully understand their financial numbers and ratios often are forced to access this expensive form of funding," Hennessy said.
LendingTree is an online loan marketplace for various financial borrowing needs, including auto loans, small business loans, personal loans, credit cards, and more. They also offer comparison shopping services for automobiles and educational programs.