What is Cash Flow Financing?

Cash flow financing is a type of money management strategy that calls for securing some type of financing to enhance the flow of cash within the company. This approach often involves creating a more desirable cash movement by taking out a loan that is backed with the proceeds from the anticipated cash flow of the business. There are a couple of different ways to achieve this type of financing and provide the business with immediate money rather than waiting for payments on business invoices to be tendered by clients.

One of the more traditional means of managing cash flow financing is to obtain what is known as a cash flow loan. This approach usually involves securing a short-term loan from a lender, with the loan paid in full as soon as payments on outstanding customer invoices have been received. This one time loan arrangement is often an ideal solution for companies that deal with seasonal downturns in revenue. The loan can provide the business with the funds needed to maintain operations during the slow period, then retire the debt when sales increase during the next seasonal phase.

Another approach to cash flow financing involves securing a line of credit. With this approach, the business simply draws on the credit line when and as needed, retiring the amount borrowed as revenue is collected from customers or the investments held by the business. This approach is somewhat more flexible than the short-term loan, since the company can make use of the credit line when needed, avoiding the payment of interest during those months when the balance on the line is at zero.

A third approach to cash flow financing involves obtaining an advance on receivables from a lender who effectively buys those invoices and advances most of the face value of those instruments to the borrower. Known as factoring, this approach is often a good option when a company has sustained some type of financial setback and needs to obtain cash sooner rather than later. The factoring partner holds a certain percentage of the face value of the invoices until they are paid in full, then subtracts a small amount as the fees for providing the service. At that point, any remaining balance is paid out to the business.

Companies considering factoring as a way of achieving cash flow financing should remember that this type of deal usually involves changing the remittance address to one supplied by the factoring service, and that most will require that the relationship continue until the client can settle the account in full. In addition, the factoring service often takes over the collection process on past due invoices, a move that could potentially cause long-term damage to relationships with some customers. Before committing to any factoring arrangement, it is imperative to read the terms and conditions found in the factoring contract, and to understand the exact processes that are used in collections, including the type of verbiage used in telephone, email, and postal mail communications with the customers.