Cash Flow Financing Explained

To become a successful business owner, we should not stop exploring our options about how we’re going to make it bigger.

However, the problem is that we don’t always have the funds to make these adjustments — most businesses have the same problem too. So what are our options?

If we don’t have the funds, we can always get a loan. But what if we don’t have a lot of physical assets? Do we have the funds to borrow money from our company?

This article covers cash flow financing, why it is an option for us, and how it works.

What is Cash Flow Financing?

cashflow If cash flow funds a loan to a company, that is called cash flow financing.

Most businesses find it helpful instead of getting loans from other sources of funds or using assets as collateral.

Many companies that already have positive cash flow use cash flow financing It’s because they generate enough profit and have good financial standing.

That’s why when a company uses cash flow financing, they’ll either use it for funding new operations, acquiring new assets, or extending to a new business.

How Does it Work?

First, the company will borrow the money from a portion of its projected cash flow that it will generate in the future.
The bank or creditor then analyzes their positive cash flow to determine how they can extend the company’s funds.
Once they get the funds, the bank or creditors will make a payment schedule based on the company’s future cash flow.

Cash Flow Loans vs. Asset-Based Loans

While cash flow financing allows us to borrow money from our company, Asset-based financing is a collateral-based loan.

Different financial institutions help companies borrow money with collateral such as equipment, machines, company vehicles, inventory, etc.

The bank will then apply a lien on the collateral, and if the company fails to pay the loan, the said collateral will be collected by the bank.

Although cash flow financing works the same, the cash works as the collateral for the loan in this option. However, it doesn’t use physical assets.

Companies that use cash flow financing are mostly small businesses, while companies that mainly use asset-based financing are companies with many physical assets such as manufacturers.

What is the Cash Flow from Financing Activities?

Cash Flow from a financing activity is the number of funds that the company generates during a specific cash flow time.

It focuses on how a firm raises its capital and pays it back through capital markets.

All the financing activity includes the issuance and repayment of equity, reflected on the cash flow statement.

These financing activities include:

Issuance of debt
Repayment of equity
Payment of dividends
Repayment of debt
Capital and finance lease payment

That’s why it is essential for business owners, accountants, investors, and financial analysts to fully understand what makes these cash flow statement sections entirely and what they include.

What Is an Example of Cash Flow From a Financing Activity?

If a company loans money, whether it’s short-term or long-term, or if a corporation shares its selected stock and receives cash, the net proceeds will show as positive amounts in cash flows from the financing activities section of the cash flow statement.

The positive amount proves to the reader that the cash was received and increases the company’s money and cash equivalents.

When a company pays the portion of the short-term or long-term loans, redeems some of its bonds payable, purchases its share of capital stock, or pays dividends, the amount of cash will then show as a negative amount in the cash flow from the financing activities section of the cash flow statement.

The negative amount proves to the reader that the cash was used, and the company’s money and the cash equivalents were reduced.

What is a Cash Flow Statement?

cash flow comparison One of the main financial statements of a non-profit or a business entity is the cash flow statement.

It reports the company’s cash flow during the same period of the income statement.

It lists the primary reasons for any changes in the company’s money and cash equivalents reported at the beginning and the end of the accounting period.

Cash flow statements are always needed because the income statement reports the revenues earned and the incurred expenses.

These figures are different from the amount of money received and paid.

It is organized into four sections:

Cash from investing activities, cash from operating activities, cash from financing activities, and supplemental information such as the following:

Income taxes paid
Paid equities
Non-cash exchanges

What Is the Finance Cost in the Cash Flow Statement?

Finance costs are referred to as the interest cost or financing cost. Usually, this applies to short-term and long-term loans. It also includes the following:

Payment of discounts and premiums related to the loan
Payment of costs incurred with the loan or payment arrangements
Finance charges of the finance leases
Difference between Foreign currency exchange to the covered interest cost.

What is Cash Flow Banking?

Cash flow banking is purchasing a cash value in a life insurance policy to self-finance, make investments, create free cash flow, and make purchases as well.

It provides you access to your capital without going through the hassle of the bank’s traditional loan process.

When you get a loan from a bank or financial company, you must pay with principal and interest until you pay it in full.

But in Cash Flow Banking, the leveraged money against life insurance value is similar to a credit line because you only have to pay the interest. You will not be required to pay the principal.

By using cash flow banking, you get to have options to manage your finances.

Since your loan comes from the general insurance fund and is fully collateralized, you have the flexibility to use the money you borrowed and just pay the annual interest. In contrast, you have full control over delivering your principal payments.