Cash loans: what are they and what are the best options?

What is a cash loan?

Cash loans can fund a variety of purposes, such as:

  • Purchase inventory.

  • Hiring staff.

  • Do the payroll.

  • Cover current expenses (e.g. rent, insurance).

  • Manage a seasonal slowdown or a cash shortfall.

How do cash loans work?

Cash loans are generally available from online lenders. Instead of relying on your credit score or collateral available, these lenders prioritize your business income when underwriting your loan application.

Cash flow lenders may ask to see your bank statements, financial statements, and merchant accounts, among other documents, to assess the historical and projected performance of your business. Although the lender may check your credit history and ask you how long you’ve been in business, these factors tend to weigh less heavily on the decision-making process.

If you are approved, the lender will also use their assessment of your finances to set your interest rate and repayment terms.

Some cash loans will be structured like a standard term loan or line of credit, while others will work like a merchant cash advance. In this case, you receive initial capital and pay it back using a percentage of your debit and credit card sales, plus a fee.

In general, cash loans have shorter terms and higher interest rates than more conventional small business loans, such as bank or SBA loans.

  • Quick funding. If you need a business loan fast, some cash lenders can approve and fund applications in just 24 hours. And while bank and SBA lenders can take weeks or even months to issue funding, most cash loans are available within business days.
  • Streamlined apps. Cash loans are usually issued by online lenders, which usually offer a simplified application process. You can often complete and submit a simple application with minimal documentation required. Additionally, cash flow lenders can leverage technology to underwrite your application – asking you to connect your financial accounts to their online platform – instead of requiring you to submit documents for them to review manually.

  • Flexible requirements. Cash flow lenders prioritize your historical and projected earnings when evaluating your application, which means they are generally more flexible with traditional business loan requirements. Although requirements vary by lender, startups and/or businesses with bad credit may qualify.
  • No physical collateral required. You don’t need to provide physical collateral, such as equipment or real estate, to secure a cash loan. Asset-based lenders, on the other hand, will require collateral to secure your financing.

  • Can be expensive. Due to their unique underwriting process and lack of collateral, cash loans are considered riskier than traditional business loans. To compensate for this risk, lenders usually charge higher interest rates and fees, ranging from 10% to 99% APR. Interest rates can even hit triple digits with products like merchant cash advances.
  • Frequent refunds. Cash loans generally have short terms and frequent repayments, daily or weekly, rather than monthly. This payment schedule can impact your cash flow and be difficult to manage, especially if you are a seasonal business or have taken out a loan to fill a cash flow gap. Frequent payments combined with high interest rates can trap you in a cycle of debt that’s hard to get out of, especially if you need to take out another loan or refinance to pay it off.

  • Personal guarantee / business lien required. Although you don’t need to secure your cash loan with physical collateral, most lenders will require you to sign a personal guarantee. This agreement states that you will repay your loan with your personal assets if your business defaults. Some lenders may also take a lien on your business assets. This document allows a lender to use your company’s assets to recover its losses in the event of default.

How to get a cash loan

To get a cash loan, you can follow these basic steps.

Understand your financing needs. Determine what you will use your loan for, how much capital you need, and how quickly you will need it.

Evaluate your professional references. You’ll want to take a close look at your historical earnings, projected earnings, cash flow, and other financial data. Although your credit score may not be a top priority for cash flow lenders, you should also check your credit history to help you get an idea of ​​the type of loan you qualify for.
Research and compare lenders. Explore several lenders online to find the right option for your business. When comparing different options, consider factors such as interest rates, repayment terms, speed of funding, application process, customer service, and reputation of the lender.

Submit your application. Cash flow lenders usually offer simple online applications that can be completed in minutes. You should not need detailed documentation, but you may be asked to provide:

  • Personal and professional tax declarations.

  • Personal and business bank statements.

  • Financial statements of the company (for example, profit and loss account or balance sheet).

You will also likely need to sign a personal guarantee.

Review your loan agreement. Read your loan agreement carefully before signing it and make sure the interest rates and repayment terms are clearly defined. Instead of using an annual percentage rate, some cash flow lenders may give simple interest rates or factor rates, so you’ll want to try calculating these rates into an APR to better understand the cost of your loan. .

If you have any questions or concerns about your agreement, contact your lender for clarification. If a lender doesn’t provide rates and terms up front or seems reluctant to provide straight answers to your questions, it could be a red flag of a predatory company. In that case, you might consider looking for a loan elsewhere.

Find the right business loan

The best business loan is usually the one that offers the lowest rates and the most ideal terms. But other factors, like funding time and your company’s qualifications, can help determine which option you should choose. NerdWallet recommends compare small business loans to find the best one for your business.

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