In finance, cash flow refers to the net amount of money moving in and out of your business over a period of time. Positive cash flow is what every company wants — inflows exceed outflows, allowing you to meet your financial commitments while growing your business.
Negative cash flow means your outflows exceed your inflows. When this happens, you may need to secure funding to cover the shortfall — this is called cash flow financing. We'll examine the risks and benefits of different types of cash flow lending to help you decide which is right for your business.
What Is Cash Flow Finance?
Cash flow finance is a type of business funding designed to bridge cash flow gaps, such as late customer payments, seasonal fluctuations, unexpected expenses, and even rapid business growth. This kind of financing is used by over 40,000 UK businesses a year.
Rather than allowing delayed payments to hold your business back, cash flow finance affords you the flexibility to pay suppliers, cover essential costs, and keep operations running smoothly.
How Does Cash Flow Finance Work?
Cash flow finance uses your company's revenue history, projections, and cash flow forecast as the basis for funding decisions.
The process typically follows four steps. Your business applies for funding, providing documents such as bank statements, invoices, and financial records. Your application gets reviewed by lenders, who look at your income, trading history, and revenue. If approved, you'll usually receive the money within a few days, sometimes in as little as 24 hours. You then repay over time — typically automatically through your future income, either in fixed instalments or with a percentage of your revenue.
Who Is Eligible for Cash Flow Finance?
One in four SME leaders feel stressed about cash flow, with searches for "small business cash flow management" rising by 80% year-on-year. Eligibility generally depends on whether your business has regular income and has been operating for at least 6-12 months, rather than on assets or personal credit.
Businesses eligible for cash flow financing are usually those with steady, regular income, a solid track record of trading, and a clear need for working capital.
What About Invoice Finance?
If unpaid invoices are a recurring cause of cash flow pressure, invoice finance may also be worth considering. It allows eligible businesses to access a proportion of the money tied up in outstanding invoices before customers pay.
Common Types of Cash Flow Lending
Invoice Factoring
Invoice factoring is a type of cash flow financing where the provider lends you a percentage of your unpaid invoices and takes responsibility for collecting those payments from customers.
Invoice Discounting
Invoice discounting is similar to factoring, except that you maintain control of your customer relationships and collections. Providers will usually loan 70-95% of an invoice's value within 24-48 hours.
Merchant Cash Advances
Specialist finance and payment processing companies sometimes provide access to cash that's repaid through a percentage of your future card sales — a great option for small businesses with regular income from card payments.
Business Loans
Short-term business loans from banks and other providers offer a lump sum you can repay over an agreed period.
Lines of Credit
A business line of credit provides access to funds up to an agreed limit, working similarly to an overdraft.
Cash Flow Loans Compared
| Finance option | Uses unpaid invoices? | Flexible access to funds? | Provider collects client payments? | Best for businesses with |
|---|---|---|---|---|
| Invoice factoring | Yes | Yes | Yes | Outstanding customer invoices |
| Invoice discounting | Yes | Yes | No | Outstanding invoices, wanting control over client relationships |
| Merchant cash advance | No | Usually fixed | No | Regular customer card sales |
| Business loan | No | Usually fixed | No | One-off funding needs or larger amounts |
| Line of credit | No | Usually fixed | No | Short-term, temporary cash flow gaps |
Benefits and Risks of Cash Flow Finance
Benefits include fast access to funds, help covering everyday expenses like wages and suppliers, no need for physical assets as security, and bridging the gap between completing work and getting paid.
Risks include fees and interest charges that can increase the cost of borrowing, eligibility and limits that depend on the provider's assessment, potential over-reliance on external funding, and — for factoring specifically — giving providers visibility or control of your customer invoices.
How to Apply for Cash Flow Finance
Check your eligibility against your provider's requirements. Gather your financial information — bank statements, accounting records, invoices, cash flow forecasts. Submit your application explaining how much funding you need and why. If approved, the money is often made available quickly, and you'll then manage repayments according to the agreed terms.
Is Cash Flow Finance Right for My Business?
Cash flow finance may be right for your business if you have predictable revenue but are being held back by unpaid invoices or cash flow gaps. It's best for businesses that are otherwise healthy but need fast, flexible access to working capital.