Asset Based Loan

Cash Flow Loan – Is it the Right Fit?

Cash flow loan programs, based on using business bank statements to assess the cash flow of a business, are available for a businesses. However, are they a fit for most businesses?

This will depend primarily upon the real time cash flow figures in the company’s business checking accounts, the company’s gross and net income, and the profit margin of the business.   The company’s bank account beginning, ending and average balances are important as they will influence the daily and monthly payment a company is able to make.   If a company deposits $25K to $50K into their account on a monthly basis, but their beginning and ending balances are approximately $5K, they will not be able to handle as high of monthly debt service as a company that has the same dollar amount of deposits per month, but higher beginning and ending balances.

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The company’s gross and net income figures are also a strong indicator of the type of financing they may be able to handle.    A company with gross receipts of $250K per year will not be able to handle the same monthly debt service as a company with gross receipts of $1 -$2 million.     The net income figure may also be closely tied to a company with higher or lower bank account daily balances.

The profit margin is also an important % to consider due to the cost of this type of financing is typically significantly higher than other types of financing.    As an example, a liquor store has a low profit margin, and may not be able to handle a higher percentage of financing of a cash flow loan.   The exception to this will be if the liquor store has a fast enough inventory turn around time.  If a cash flow loan is 30% per year and the merchant indicates the loan is too expensive because their profit margin is 20%, inventory turn around time has to be factored into the decision.

If inventory is turned over 1 time per year, then the cost exceeds the profit margin by 10% and the cost of financing is too expensive.

If the merchant turns over all of his inventory on an average of every 3 months, and their profit is 20%, 4 times a year will bring in an 80% return on money, far exceeding the cost of financing.   Other factors which need to be considered include the merchant having to reinvest in inventory, damaged goods, etc., but the top profit margin figure allows the merchant to consider this type of financing.

In different situations, such as a construction company, there is not any inventory turnover, and the business will consider the total profit from the job.

If a construction company has a contract that will pay them $200K upon completion of a job and their cost is $75K, then a cash flow loan based on bank statements may work well for a business in this case, and can be used to purchase raw materials, hire additional job site labor, and operate or purchase machinery if needed.

The decision whether the cost of funds on a cash flow loan is justified must be considered on a case by case basis for each business.

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