Key takeaways: 

• Knowing when and how to use financing effectively can help your business manage cash flow and take advantage of opportunities to grow.
• Deciding whether to use cash or take out a loan depends on factors including interest rates, tax implications, and the potential impact on cash flow.
• Cash flow loans can provide quick funding for short-term needs or opportunities, but you need to understand costs versus benefits.  

As a small business owner, it can be easy to fall into the trap of thinking that sales are the most important way to measure business success. Yes, revenues are extremely important. But cash flow is also key. 

If cash flow isn’t healthy, your business will struggle. You may have trouble paying expenses or investing in growth. The reality for many businesses is that cash flow fluctuates. When that happens, access to financing can help your business survive. 

Here we’ll explore how financing impacts cash flow and when it makes sense to leverage it for your business.

Is It Better To Take out a Loan or Pay Cash?

Some business owners avoid debt at any cost. But that’s not always the best move financially. 

Taking out a loan versus using cash to pay for expenses is an important financial decision. Using cash allows you to keep your business out of debt and saves money on interest costs. But taking out a loan can help you maintain cash reserves for emergencies or growth opportunities. It can also allow you to leverage debt for more growth than you may be able to achieve without it. 

Here are specific factors to consider when you’re thinking about taking on debt:

Interest rates: When rates are low, borrowing can be cost-effective. But it can also make sense in a higher interest rate environment if you can leverage that debt to make even more money. 

Tax implications: Interest payments may be tax-deductible, which can reduce overall costs. 

Opportunity cost: If you don’t have enough cash to take advantage of an opportunity, it may cost more than the cost of debt. 

Cash flow impact: While debt may allow your business to take advantage of an opportunity, you will have to repay that debt. You’ll want to be crystal clear on how those costs impact your business cash flow. 

What Are Cash Flow Loans?

Cash flow loans typically refer to short-term business financing. Often this term is associated with business cash advances or merchant cash advances, a type of financing based on the business’s projected future cash flow. 

It’s often easier to qualify for cash advances than traditional bank loans, especially for newer businesses or those with limited assets or a less than perfect credit history. 

Key features of cash flow loans:

• Quick approval and funding
• Often unsecured (no collateral required)
• Repayment may be based on a percentage of daily or weekly card sales
• Higher cost compared to traditional loans

Invoice financing is another financing option that’s often used for working capital and to smooth out cash flow. 

Cash flow loans may also include short-term business lines of credit short-term, especially those offered by online lenders. 

Even a small business credit card can be used to tide over your business when cash flow is tight. A 0% intro APR business credit card, for example, can give your business months of interest-free financing, depending on the terms of the offer. 

Most business credit cards are available to startups as well as established businesses, and the application process is usually very fast and simple. 

Finally, term loans offer a lump sum loan with repayment terms over several months to several years. They are mainly used for long-term debt.

Does Taking on Debt Increase Cash Flow?

In the short term, debt can increase your cash flow by giving your business immediate access to funds. Those funds can help your business manage expenses, invest in growth, or handle seasonal fluctuations in sales or expenses. 

However, it’s crucial to think about and plan for how your long-term cash flow will be affected by debt repayment. You’ll need to make sure your business can afford the daily, weekly or monthly payments required.  

Your goal is to use your best judgment to help ensure potential returns from borrowed funds outweigh the cost of the debt.

What Do Small Business Loans Cover?

There are many reasons an entrepreneur may take out a small business loan. Financing can cover a wide range of expenses, including:

• 1. Working capital: Day-to-day operational costs
• 2. Equipment purchases or leases
• 3. Inventory acquisition
• 4. Marketing and advertising expenses
• 5. Hiring and training new employees
• 6. Expanding to new locations
• 7. Refinancing existing debt
• 8. Emergency funds or unexpected expenses

Traditional lenders (including lenders that make SBA loans) will often ask about how your business intends to use funds if approved. Business credit card issuers will not.

How Do I Qualify for Cash Flow Financing?

Every company or lender that offers financing will have its own qualification requirements. But most lenders take into account the following factors may be considered:

1. Revenue/sales history: Business bank account statements may be required to verify whether the business brings in enough revenue, as well as trends. 

2. Credit score: Not all types of financing require good credit. But some companies or lenders will check business credit, some check personal credit, and some check both. 

4. Time in business: Most financing options require at least 6 months to 1 year of operations, while traditional lenders often require a minimum of 2 years in business. 

5. Industry type: Some industries may be viewed as higher risk. Understand how your NAICS code may impact financing. 

You may improve your chances of qualifying by using a business bank account, keeping your bookkeeping up to date (so you can provide financial statements if requested), building good business credit scores, and having a clear plan for using and repaying funds if approved.

What Is Cash Flow From Financing Activities?

A company’s cash flow statement will include cash flow from financing activities. 

Cash flow from financing activities represents the net cash used in or provided by financing your business. This includes:

• Issuing or repurchasing stock
• Taking on new loans or repaying existing debt
• Paying dividends to shareholders

This cash flow category shows how your business is managing its capital structure and rewarding investors. It’s one part of your overall cash flow statement, alongside operating and investing activities.

Should Cash Flow From Financing Activities Be Positive or Negative?

The goal is for financing cash flow to be positive in the long run. That means your business is leveraging financing activities to bring in more than it’s spending on debt repayments and dividends. 

It’s normal for financing cash flow to be negative in the short term, though, especially when your business is investing in growth.

Positive financing cash flow indicates that more money is flowing into the business than going out. Negative cash flow might mean the business is paying off debts or returning money to investors. Either can be appropriate, depending on the stage of your business and your overall goals.

• For growing businesses: A positive cash flow from financing can indicate you’re successfully raising capital to fuel expansion.

• For mature businesses: A negative cash flow might mean you’re paying down debt or returning value to shareholders, which can be a sign of financial health.

The key is to balance financing activities with operational and investment cash flows.

When Should a Business Consider Taking Out a Loan for Cash Flow Purposes?

Consider a cash flow loan when:

1. You have a clear opportunity for growth that requires an upfront investment
2. Seasonal fluctuations in revenues strain your working capital
3. You need to bridge a temporary gap in cash flow
4. An unexpected expense or emergency arises
5. You want to take advantage of a time-sensitive business opportunity
6. You’re looking to expand your operations or hire new staff to meet demand

Before you borrow, run some numbers to make sure you have a solid plan for using the funds and a realistic strategy for repayment. A business mentor can help you think through possible scenarios, and your accounting professional can help you run cash flow projections. 

And remember, while financing can boost your cash flow, it’s not going to solve profitability problems. If your business isn’t making enough money, or can’t keep expenses in check, you’ll need to solve that problem first.