Cash Flow Finance

Guide to the different types of cash flow finance products and typical fees for UK SMEs. We cover the fees, typical uses and pros and cons for different business finance requirements.

Written by

Harry Jones

Edited by

Andrew Parry

Written by
Harry Jones

Edited by
Andrew Parry

Updated: 22nd September 2025

Home » Business Finance » Cash Flow Finance

What is cash flow finance?

Cash flow finance is an umbrella term for alternative short-term financing that allows SMEs to borrow against anticipated revenue. While traditional secured business loans use your car or property to secure the loan, cash flow financing leverages your invoices or future sales.

This type of financing is growing in popularity as late payments are putting severe pressure on many small businesses. Thousands of SMEs that would otherwise be profitable are struggling to pay staff and suppliers as they wait for customers to settle their accounts. Indeed, over £20 billion is tied up in overdue invoices within the UK.

While there are a few types and arrangements that fall within the cash flow finance category, they’re all characterised by their speed and intention to reduce cash flow problems. Six months is therefore the upper range of the repayment period.

Key characteristics:

Based on future cash flows: Instead of using assets as collateral, cash flow finance is secured by the business’s ability to generate consistent cash. The better the history of reliable inflows, the better the terms agreed.
Short-term funding: It’s used for working-capital finance (monthly outgoings) and is repaid within a relatively short period, often within a few months.
Quick funding: Cash flow finance can be a faster way to secure funding compared to traditional secured business loans. With fewer financial assessments, funding can be within 24-48 hours.
Unsuitable for long-term financing: While useful for day-to-day operations, it’s not suited to long-term financial planning like growth projects.
Flexibility: Most cash flow finance products have repayment terms that align with your sales (or when receiving payment for said sales).

Types of cash flow loan products

Invoice discounting & factoring

Invoice finance is available for B2B SMEs that typically wait 30-90 days for their customers to pay. Instead of waiting weeks or months for customer invoice payments, an invoice finance provider can advance businesses up to 100% of the invoice value within 24 hours. This can be an ongoing arrangement, with every invoice added to the facility, or using selective invoice financing, whereby a selection of invoices are used for collateral.

Invoice discounting enables businesses to retain control of payment collection, whereas invoice factoring involves handing over collection responsibility to the lender.

Merchant cash advance

A merchant cash advance (MCA) is a lump sum advance that is based on your typical monthly card sales, making it suitable for retailers that rely on card machine transactions. What makes MCAs unique is the repayment structure: borrowers repay through a percentage of the daily card sales. So, on a quiet day, you will repay less. This makes them great for seasonal or volatile businesses within hospitality or retail.

Revenue-based financing / E-commerce cash advance

Revenue-based financing (RBF) provides a lump sum loan in exchange for a percentage of future monthly revenue (until it’s fully repaid). This is somewhat similar to MCAs, which are tied to card sales only, but it’s tied to revenue more broadly. Some may compare it to equity financing because the repayment structure feels similar (e.g., a dividend based on performance); however, you retain full ownership, and the repayments ultimately end.

The product is popular with e-commerce businesses and SaaS companies because it generates predictable recurring revenue, yet they often lack the tangible assets or credit history required to secure a traditional loan. RBF is great for customer subscription firms as they can absorb this cost. In other words, they can use RBF for marketing due to a high cost per customer acquisition, but it yields a positive return because the lifetime value of a customer is so high.

Revolving credit facilities

A revolving credit facility functions like an overdraft, where a pre-agreed limit is established, and the business only draws on it as needed. You only pay interest on what you use, so while the APR is often high, this makes it more affordable if you’re efficient with the utilisation. This is particularly useful for volatile businesses, where shortfalls are unexpected (if they are expected, a less flexible but cheaper form of financing may be more appropriate, like term loans). Repayments are usually flexible and accessed through online platforms or direct transfers.

Term loans

Term loans are structured more similarly to bank loans, yet they use cash-flow-based assessment criteria. These loans often finance larger amounts than other options, with longer repayment periods of 6-24 months (often fixed, monthly repayments). Term loans are therefore suited more for scaling up investments and long-term growth opportunities, such as opening a second shop and needing capital to finance the new POS, inventory, and rental deposit.

Unlike a bank loan, the application process focuses on your revenue history, customer retention, projected cash flow, and general sales performance rather than credit scores and business plans.

Business credit cards

UK SMEs increasingly use business credit cards to bridge the gap between income and expenses and could be seen as a good alternative to the types of cash flow finance above. If full repayments are made before interest is applied each month, this will be the cheapest form of finance used to improve cash flow.

How cash flow finance works

Step 1: Decide on the product

Begin by determining the most suitable type of cash flow financing. This will depend on whether you’re B2B or B2C, rely on card sales, and whether you want a facility you can dip into as and when needed.

Step 2: Gather documents and apply

Gather the documents necessary for your application, which could include bank statements, annual turnover, merchant account statements, and/or invoices, along with your general personal and business identification documents. Choose a reputable lender with clear terms and no hidden fees.

Step 3: Receive funds

Depending on the product, your application could take anywhere between 1 to 10 days (for products that require credit checks on your customers, things take longer). Once a facility is set up, funding will typically be secured within hours.

Step 4: Repayment

Repayment structures vary, but most are tied to your customers making payments. The likes of invoice factoring and Merchant Cash Advance take repayment responsibility away from your control, while other products will rely on you issuing repayments manually.

Pros and cons of cash flow finance

Pros

Speed: One of the fastest financing options available, with applications often approved within 24 hours. Rapid access to funds is a huge mental help for SME owners, allowing them to take necessary risks.
No Collateral: Given that SMEs are less likely to have large assets, cash flow financing is often more SME-friendly and meritocratic. It's much faster to become revenue-stable than it is to build up a large securable property portfolio, for example.
No Credit Score Barrier: Credit scores are often criticised for unfairly punishing those new to business or those with one or two past mistakes. Cash flow financing applications have less weight on credit score and more weight on recent business performance.
No Equity Dilution: Unlike those selling shares or using angel investors, cash flow financing allows owners to preserve equity in their business.
Scalable: As your sales grow, so does the amount you can borrow.

Cons

Costly: Interest rates and fees are typically higher than traditional financing. However, depending on the repayment structure and utilisation, overall costs may not necessarily be higher.
Short Repayment Periods: Cash flow finance is a short-term business loan, making it unsuitable for longer-term lending.
Lack of Control: Depending on the product, you may not have control over when or how the repayments are made. Automatic payments reduce your autonomy.
Harder to Forecast: A lack of fixed monthly repayment makes them harder to forecast.
Reduced Profit Margin: While no business financing is free, cheaper bank loans often return a positive return as they are frequently used for investment. Cash flow financing, however, is usually a stopgap that eats directly into profit margins. This can sometimes create an operational dependency, leading to a tightening of cash flow in the long run.

Cash flow finance vs Asset-based lending (key differences)

Collateral

Asset financing requires equipment, inventory, property or other assets to secure a loan. Should you fail to repay, the assets can be seized. This makes it riskier than revenue-based financing, which can reduce your burden of repayment during slow months.

While the risk may sometimes be higher with asset-based financing, it’s often cheaper in the long run. This makes it more appropriate for expansion, particularly when investing in physical assets (e.g., a bigger fleet for a logistics company). In other words, you’re securing the assets you’re buying with the loan, which, to many owners, feels less risky as you’re only jeopardising the additional equipment and not the assets for the baseline operations. Remember, only assets that are reliable to value will be securable, ruling out bespoke, quickly depreciating assets.

For online businesses or service-based SMEs like recruiters, there may be no assets to secure. Here, securing future revenue makes more sense.

Business performance versus credit score

Providers of both products may take into account both business performance and credit score. However, providers of cash flow lending will weigh recent performance much higher than credit score, and vice versa for asset-based lending. However, it should be noted that alternative asset-based lenders will not rely on credit scores to the same degree as banks.

Approval time

The approval time for cash flow finance is faster than asset-based lending, as the former is mostly automated by scanning bank transactions, merchant account statements and invoices. Asset-based lenders, however, may take well over a week or two to conduct asset valuations and underwrite more bespoke collateral.

The only exception here is that invoice financing can take over a week to assess the creditworthiness of your customers.

Short-term versus longer-term

Cash flow lending is usually the short-term option, as it’s designed entirely to cover working capital needs like your end-of-month bills. Asset-based financing usually has fixed repayments that may take years to pay off, particularly for property-backed loans.

The administration and fees required to approve asset valuations make it uneconomical to provide 3-month quick loans for, say, a £300 new printer.

Interest rates & fees

Cash flow financing usually carries a higher interest rate and fees. The product often serves riskier customers, where revenue could dry up entirely, whereas an asset’s value is usually more dependable.

However, the total cost of the financing may still be cheaper with cash flow financing, depending on the situation. If an expensive MCA is agreed upon but sales completely dry up, the total cost of the advance remains fixed, regardless of the repayment period. This means that the longer it takes to repay the advance, the cheaper it becomes compared to time-based borrowing, such as asset financing.

Another example is with revolving credit facilities. While known for having much higher interest rates than asset financing products, if a company only needs to dip into the facility for a day or two each month, it could be cheaper overall.

Personal guarantees

Personal guarantees are usually required for all types of SME lending products, with exceptions being made for large corporations.

For risk more broadly, cash flow financing usually has less repayment risk because it’s tied to revenue, which tends to correlate strongly (though not always) with your ability to repay.

Asset-based financing risks seizing assets, which can be considered less risky than cash flow financing in some circumstances. For example, the seized asset may not be core to the operations, and it’s often not a personal asset. Losing this could be preferable to defaulting on a cash flow financing product, which could result in the personal guarantee being triggered if there are no business assets to seize.

Which businesses are eligible for cash flow loans

6-12 month trading history is typically required, as this is long enough to generate consistent revenue and loyal customers
Turnover requirements vary widely, but £100,000 is a common ask by many major lenders. However, minimum turnover requirements range from £50,000 to £750,000+
Credit scores may be checked, but most providers do not mention credit scores when it comes to eligibility criteria.
Director guarantees are often required when taking out a facility. However, when using invoice factoring, arrangements are akin to selling your invoices, and therefore may not require a personal guarantee.

How to apply for cash flow finance

Applying for cash flow financing is typically more straightforward than traditional loan applications. Minimal documentation is needed, and the process can be wholly online if preferred.

Required documentation

It depends on the product, but most applications will centre around cash flow statements (CFS) and projections. Most lenders ask for:

6-12 months of bank statements
Recent management accounts or profit/loss statements
Cashflow forecast projecting future income
Director identification and proof of business address

Depending on the product, you may also be asked for:

Invoices
Customer ageing report

Once you gather your documents, you can use a broker to assess your options instantly and help you with the application process. The process is usually:

The broker presents you with quotes and options
Initial inquiry
Upload documents
Credit assessment
Receive funding proposal
Agreement signing
Funds are released

Why would a business need cash flow finance?

SMEs often struggle with cash flow due to several reasons, including limited or no cash buffer, reduced leverage to expedite supplier payments, and overheads that often constitute a higher proportion of their costs. Therefore, cash flow financing helps lean into their strengths and inject capital to meet liabilities such as:

Covering payroll
Utility bills
Rent payments
Purchasing inventory
Marketing and advertising
Emergency expenses

Real-World Case Studies

Example 1 – Landscaping growth opportunity

A landscaping business secured a commercial contract that would double its business size. However, the extra labour required would be unaffordable, as payment for the new contract wouldn’t come until the project was complete. Traditional lenders would only offer £30,000 due to their limited size and affordability concerns, but they needed £60,000.

The solution was to reach out to Clifton Private Finance for a cash advance. The provider saw that their Stripe card payments were consistent. Overlooked by traditional providers, these card sales helped arrange an MCA for the remaining £27,500 that was needed.

The result was working capital funded immediately to pay extra staff and to sign the new contract on time. This helped double the business size, grow its reputation, and revenue.

Example 2 – An unusual funding strategy for an acquisition

Stort Chemicals wanted to acquire Zanos Limited during the turbulent period of 2020. Despite being financially strong, high street lenders halted their funding of mergers and acquisitions.

The solution was to use a broker who organised a deal with Close Brothers Invoice Finance. Here, they sought two types of financing:

An IDEAL invoice discounting facility
A Coronavirus Business Interruption Loan Scheme (CBILS)

While cash flow financing is often claimed to be an inappropriate solution for long-term projects like M&As, this case study shows the nuance and knock-on effects. While the CBILS loan directly funded the acquisition, it still required support from the invoice discounting facility to maintain liquidity and job security during the pandemic. In many ways, the cash flow financing helped meet the repayments of the long-term financing.

The result was £2.2 million in funding within two months. The acquisition of Zanos Limited was a success and timely, and Stort Chemicals kept its cash flow stability without lay-offs.