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Why is Cash Flow Capital So Important for Business Funding?

Small and medium enterprises applying for business loans may have noticed that many lenders are particularly interested in a company’s cash flow capital. In many cases, cash flow capital status can have a significant difference on how risky an SME is deemed to be by a lender, and could affect chances of approval. If you’re wondering how cash flow capital could affect your business, here’s what every small business in the UK should understand about cash flow capital and business lending:

What is Cash Flow Capital?

It’s important to understand that cash flow capital is different from net profits, although they are both similar. Whereas profits show how much money a company has made when manufacturing costs and other outgoings are taken into account, cash flow capital looks at how much of that is spendable money. If a business has made a £1000 profit in one month,for example, but owes £500 in loans, it’s left with £500 cash that’s free to be invested in business growth and development. This is cash flow capital. Freeing up cash flow capital is one of the best ways for business to expand their brand.

What Does Cash Flow Capital Tell a Lender?

What many businesses want to know is why cash flow capital status is so important to lenders when taking out business funding. The status of an SME’s cash flow capital can tell a lender three things:

  • How much spendable cash a business has available to make monthly repayments.
  • How much money a business is expected to make within any given time frame.
  • How many financial resources a business has available for future growth and development.

These three aspects are all very important to lenders. Essentially, when combined, these aspects help lenders to determine how risky an investment may be, which dictates whether or not business funding will be approved. Ultimately, what lenders want to see if whether or not a small business can reasonably be expected to keep up with repayments, and cash flow capital answers this question.

Increasing Cash Flow Capital

In a perfect world, what lenders want to see is small businesses with high cash flow capital – demonstrating that they have enough money that’s not tied up in other things to repay the loan. So how can a business increase their cash flow capital? Through exhibiting sensible lending behaviours. One of the main advantages of business loans is that they free up cash flow for growth and development, yet cash flow capital can suffer if high interest rates ties up this flow. It’s vital for small businesses to borrow responsibly, and to compare business loans online to find the most affordable rates. Check out the handy online comparison tool at compareyourbusinesscosts.com.