11 May Top 5 “Need-To-Knows” Before Taking A Short Term Loan

Australia has a variety of short term loan options growning in popularity. We’re going to focus on cash flow loans. You’re likely to come across these online so it’s important to know the “how”, “why” and “what if” before you sign up.

Let’s Understand A Cash Flow Loan

Business loans are almost always focused on company’s assets, such as equipment, real estate or accounts receivable. Cash flow loans (sometimes called unsecured business loans) are determined by the company’s expected future cash flow by taking a historical view of the previous years deposit history. Typically, cash flow loans vary from as low as $5,000 up to $250,000; repayment terms range from three to twelve months.

The application process is much shorter than a traditional bank loan. The lenders will want to see your cash flow history, and will look at a variety of factors, including your customer base, tax liabilities, and your personal credit rating. Lenders are relatively quick to offer loan approvals with time ranging from a few hours up to a few days depending on the loan size.

Generally, repayments are directly debited from your bank account daily or weekly, though we have seen some monthly repayments allowed however, it’s rare. Basically, as you make money, the lender debits a fixed amount to meet the repayment schedule for the period of the loan.

Who Cash Flow Loans Work for

Cash Flow loans or Fixed Term Loans are best suited to businesses that make a large amount of regular small-dollar sales. If you have lumpy turnover or large seasonal trading periods this might rule you out. Lenders also like to steer clear of the construction industry.

You will need to be in business for at least 12 months to qualify for a cash flow loan, since past cash flow is a consideration for lenders.

Keep in mind that these types of loans create a liability on your books, receiving a large sum of money that is not based on any existing asset base to fall back on needs careful consideration to where the money is being spent, if you are not using it to generate new sales for profit to meet repayments then any slow-down in business activity may leave you short to repay.

What to Know Before You Apply

A savvy entrepreneur will want to be armed with a good understanding before taking on any new loan facility, we’ve outlines a few to help educate our borrowers.

Rates: Cash flow loans aren’t secured by any tangible assets such as property, they are riskier for lenders than asset-backed loans. As a result, they’re pricier than bank loans. Rates typically start at around 20 percent. The shorter the loan term, the higher the rate.

Costs:  Ask exactly what fees you will be charged, most lenders Loandesk works with provide full clarity on costs and are vetted. These can include loan origination fees, late fees and fees for insufficient funds etc.

Loan Guarantee: Lenders will require you to sign a personal guarantee. This means that if your business can’t pay back the loan, you will still be liable for the debt. You’ll do well to find a lender that doesn’t require you to stand behind the loan and if you’re not required to, we’re sure you’d be paying through the nose for the privilege.

Repayments: Daily or weekly repayments, means you will need to ensure you have a cash balance to cover these, missed payment fees quickly add up. We usually recommend setting up a dedicated account and deposit at least one month of repayments, make sure you top it up each month.

Defaults: Be brutally honest about cash flow projections, if things drop of down the line then you’ll put yourself in a worse position. If you believe you might have lumpier cash flow in the near future, you may need a different finance product to allow for these fluctuations.

It’s called a short term loan for a reason.

As with any type of business loan, making a cash flow loan work for you requires fully understanding repayment responsibilities. If you do go ahead with loan, ensure you’re only borrowing the least amount possible as you can always re-apply later rather than locking yourself into a larger repayment schedule.

We’ll match you to the right lender, complete your profile to see options.

About Leigh Dunsford

I am a small business finance & lending columnist at Loandesk, teaching entrepreneurs what loan options are available to them in Australia, explaining the differences between each loan type & how to position themselves for the best chance of getting approved for their perfect loan. My thoughts have been published on Startupsmart, CEO Magazine, Smartcompany & more...

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