For businesses in 2025, maintaining a healthy cash flow is one of the most critical areas to ensure success. While profit is too often the sole focus for many, the day-to-day flow of money is what keeps the operations of a business functioning – the adage of ‘cash is king’ remains true.
Throughout this guide, we will explain the importance of cash flow and the funding options available for when unexpected cash flow problems occur. By looking at the advantages and risks, you can determine whether seeking cash flow funding is right for you and your business.
Why is cash flow so important?
Cash flow is the lifeblood of any business, no matter the size or industry. Adequately managing the money moving in and out of the business ensures a company is able to pay its bills, meet payroll obligations, purchase inventory and invest in research and development.
Even if a business is profitable, poor cash flow management can lead to failure. Some reasons for prioritising cash flow include:
Meeting obligations
As a business owner, keeping track of payments to suppliers, employees, rent, utilities and taxes is essential for avoiding surprises.
Safety net
A healthy, positive cash flow allows businesses to absorb shocks like customers paying late, or sales fluctuations, and remain able to complete daily operations without interruption.
Growth and investment
With space to invest cash in the future of the business, founders can explore equipment, staff, marketing and other expansions.
Overall health
Cash flow often provides a more accurate picture of business health than just profit, reflecting an ability to cover commitments.
Cash flow issues are a leading cause of small business failure. Studies consistently show that poor management of cash flow, or simply a lack of understanding of cash flow, is a major factor. One study attributes 82% of business failures to cash flow issues, with reasons stated such as starting with insufficient funds, lack of planning or poor monitoring.
Types of cash flow loans
There are a wide variety of cash flow funding options, designed for different requirements:
Unsecured loan
The most common type of loan used to ease cash flow issues is an unsecured business loan.
These can be either short-term loans or longer-term ones with early repayment benefits where you can save on interest if repaid early.
Overdrafts
Historically, overdrafts are the most popular way that businesses manage their working capital. They can still be a good option, but these days there are similar alternatives offering more flexibility and higher credit limits.
Revolving credit facilities
Similar to overdrafts, but without the need for a bank account, revolving credit facilities are a pot of funds that you can access as needed. You’re usually charged on the amount you drawdown and in some cases there’s a small fee to use the facility.
Invoice finance
A good option if you offer credit to your customers in the form of invoices with payment terms. With invoice financing, You can usually choose to get a percentage of all or a selection of the invoices due to be paid to your business.
Merchant cash advance
Merchant cash advances are an option if you make a good percentage of sales through card machines or online card payments. Repayments are taken as a percentage of card sales, which means the amount you pay flexes in line with how much you sell.
VAT loans
VAT loans can help when it’s time to pay your VAT bill to HMRC. VAT payments are often a significant outlay in one go, so the ability to spread the cost over a longer period can help ease the pressure on your cashflow.
Advantages of cash flow loans
Some of the main advantages of cash flow loans include:
Quick access
Cash flow loans are known for quick approval times. These fast applications (when compared to traditional loans) allow businesses to secure funding quickly, in situations where urgent funds are required. This can address unexpected expenses, payroll obligations or capitalising on a time-sensitive opportunity.
No collateral
Cash flow loans don’t typically require physical collateral like property or equipment. For businesses that lack significant assets but have strong revenue streams, this type of funding is ideal. Furthermore, a business that may have a poor credit score is more likely to get access to a cash flow loan, if they can demonstrate revenue-generating ability.
Flexible repayments
The repayment schedules are generally tailored to an individual business’ revenue cycle, reducing the risk of cash flow strain during repayment periods.
Versatile use
You are most likely free to use the funds from a cash flow loan however you please, whether it be to cover operational costs, bridge a short-term gap, invest in growth or resolve an emergency.
Credit score improvement
Successfully managing the cycle of a cash flow loan can aid in building your credit score, making it easier to access larger loans or more funding in the future.
What are the risks of cash flow lending?
Some potential risks may include:
High interest rates and fees
Compared to traditional loans, cash flow loans typically come with higher interest rates and fees. If you miss a payment, these costs can add up quickly, in addition to the penalty fees (which can be substantial).
Personal guarantee
Without putting up business collateral, lenders may require you to make a personal guarantee, with you and your personal assets being held personally liable for repayment if your business defaults.
Short repayment terms
While repayment terms are flexible depending on your business’s payment schedules, expect to be paying back the loan within a year. Paradoxically, this can create cash flow pressure if managed incorrectly. Seasonal fluctuation or unexpected downturns can all have significant impacts on the ability to manage repayments. Furthermore, some lenders can require automatic payments. For businesses with variable and unpredictable cash flow, overdraft penalties may be incurred if the account lacks sufficient funds.
Risk of default
If you cannot meet the repayment obligations, you risk a default which would have significant impacts on your business credit score. Not only would this limit future borrowing options, but also potentially result in legal action or the loss of assets.
Limited suitability
Cash flow loans are not to be considered a ‘one size fits all’ approach to funding. They are designed for very specific situations, being best suited for short-term needs. You should not rely on these types of loans for ongoing or long-term cash flow issues.
Conclusion
In conclusion, cash flow shouldn’t just be considered a financial metric. As a key indicator of stability and growth, cash flow loans can help keep your business viable in times of difficulty. An understanding of how cash flow loans work is crucial, and assessing whether you are correctly equipped to handle them. Cash flow management can be the difference between thriving and surviving.
If you’re interested in improving your cash flow, make sure to read our guide on 11 ways to improve cash flow.
If you are looking for a loan to help your cash flow, Rise Funding can help find the best option for you. Whether it’s a cash flow loan or others, we’re here to help you make a decision with confidence.
Contact us via the form below, or get an instant business quote through our online questionnaire.
