Cash flow loans work by setting your line of credit based on your monthly revenues. If your company does $100,000 per month in business, then the cash flow lender may give you a 1x line, meaning that they will lend up to one time your monthly sales, $100,000 in this case. Your payments are made by EFT withdrawal on a daily basis.
In some cases such as companies with recurring revenue like SaaS companies, the multiple may be as high as 5x monthly revenue. Recurring revenue commands a higher multiple because the streams of cash flow are more reliable than one-off sales that many companies have.
Cash flow loans carry a higher interest rate than a normal banking loan, but they can be a good alternative to selling equity in your company which is pretty expensive in the long run. Some companies may use cash flow loans as a part of their valuation strategy to get themselves past key milestones to the point where they can raise equity at a higher valuation than they could have without that growth.
Come meet Jon Engleking from Guppy Tank, an alternative lender, at the RVC Banking Strategies for Startups event Tuesday evening June 11th from 5:00-7:30. We will have great networking, lots of angel investors in attendance, a panel with commercial banking, venture banking and alternative lending viewpoints.