The Problems With Cash Flow Financing

Posted by Ihsan Ibrahim on September 12th, 2016

As the name would perhaps indicate, with the form of business financing commonly referred to as cash flow financing, the borrower will receive a capital sum of money from a relevant lender which is provided in the form of a loan. Like any other type of loan, the borrowing business will be required to repay back not only the capital sum of money that was borrowed from the lender, but will be required to pay out for interest as well.

However, the way in which a cash flow financing loan will differ from a traditional loan whereby fixed, tangible assets are then secured as items of collateral for the benefit of the lender in the event of default on the loan by the borrower is that the repayment schedule is determined according to the cash flow statements of the borrowing business.

Just like a traditional, asset backed loan, a cash flow financing loan can either be of a secured or unsecured nature. If the cash flow based loan happens to be unsecured, then no collateral will be staked by the borrowing company. Unfortunately, this then means that they are held to be liable for a higher rate of interest to the lender, and will also be unable to acquire as large a capital sum as would be available with a secured loan.

It should be noted that a cash flow funding based loan is not without its drawbacks and potential risks, and so with that in mind then, it is incumbent that the borrowing business owner is fully aware of the risks involved and then makes a decision with these firmly in mind.

It is absolutely imperative that the borrowing business owner has a back up plan, and is not overly optimistic in the repayment schedule identified by reference to the cash flow of the business. Specifically, if the repayment schedule specified as per the agreement per the lender and the borrower is set too harshly, then this means that the is in a risky position.

The reason for this is that there is no predicting the long term viability and success of a business, even with the most highly qualified and experienced financial advisors and accountants in the world. This is due to the fact that a business is not a singular, self-contained entity which has to act on its own merits, but rather, it will need to interact with the world at large.

In other words, even though the business itself maybe fairly robust, there maybe a chance that there is a depression in market conditions meaning that consumers no longer wish to rely upon that service or purchase that product. In addition, the suppliers of the business may have to increase the prices that they charge for the materials that they supply the business, which in turn will eat into the profit margins of the business.

Due to the fact that there are so many unknown variables and so much guesswork involved with this type of business financing, the business owner should think carefully about how to proceed.

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