Cash flow financing explained

Cash flow financing is a way of borrowing funds against your future cash inflows, instead of against business assets.

A laptop displays a completed cash flow statement.

In this guide, we explore cash flow financing, along with how to calculate and use the cash flow financing section of your cash flow statement.

What is cash flow financing?

Cash flow financing is a type of unsecured business loan. You borrow against your future business cash flow, and pay it back using this upcoming income. It’s a handy option for businesses with plenty of sales but few assets for collateral (like equipment or machinery).

On a cash flow statement, you’ll typically see three sections: cash flow from operations, cash flow from investments, and cash flow from financing. If you choose to use financing cash flow products, loans and repayments will appear in the final section of this statement.

Managing cash flow effectively is one of the fundamentals of running a healthy business. Completing regular cash flow forecasts can help you get a clearer picture of your upcoming revenue and bills. But sometimes, unexpected costs or bills can disrupt your cash flow.

In these situations, cash flow financing can provide a lifeline for small businesses that need to cover a cost, but don’t have available cash to pay for it. For example – you might run a popular seaside cafe that needs a replacement coffee machine before the summer. Cash flow financing could help you cover the cost, so when the sunshine comes around you’re ready to serve customers and make repayments on the loan.

Common types of cash flow financing

There are plenty of options to choose from. Here are some examples:

  • Invoice financing: Instead of using assets as collateral, you sell invoices to a third-party lender at a discount in exchange for immediate finance. You’re effectively borrowing against your customer invoices.
  • Merchant cash advance: If you make card sales, a merchant cash advance could work for your business. You get an advance on your card sales and repay it as a percentage of future card sales.
  • Revolving credit facility: Withdraw credit to spend in your business, repay it, and borrow again when you’re in a pinch. Revolving credit facilities let you borrow, repay, and repeat the process when you need it.
  • Peer-to-peer lending: Individuals or groups of investors are matched with borrowers – peer-to-peer, minus the bank. You can find peer-to-peer lending platforms online.

Financing activities in cash flow statements

There are lots of different ways your business can generate income and spend money.

On a cash flow statement, operating cash flow shows the money you generate in sales and spend on expenses. Investment cash flow shows where you’ve sold or bought business assets. The financing cash flow section shows the money you receive through loans and contribute to repayments – plus owner drawings and dividend payments.

Focusing too much on any single aspect of a cash flow statement will distort the view of your business’s financial health. Lots of incoming cash flow from financing activities could make it look like your business has a healthy margin – but businesses don’t exist to take out loans.

Ideally, you want most of your income coming from sales (your operating cash flow). Keep an eye on your financing cash flow activities to make sure your business isn’t too dependent on loans.

How to calculate financing cash flow: A step-by-step guide and example

Financing cash flow is the third and final section of a cash flow statement. To calculate this you need to factor in cash received from lenders, repayments made, and any owner drawings or contributions.

Let’s take a closer look.

Understanding the basics of financing cash flow

Debt, equity, and dividends all have an impact on your business’ cash flow. In the cash flow from financing section of your cash flow statement, you’ll see:

  1. Cash from loans
  2. Owner contributions
  3. Repayment of loans
  4. Owner drawings
  5. Payment of dividends

Now, let’s put these together.

The formula for financing cash flow

Cash inflows from issuing debt (borrowing from lenders) + cash received from issuing equity (selling shares) - dividends paid - debt repayments = financing cash flow

Let’s look at each part of this equation:

  • Cash inflows from issuing debt: money you receive from lenders when you borrow against assets or cash-based financing
  • Cash received from issuing equity: money you receive from lenders in return for ownership shares (like common stocks)
  • Dividends paid: cash payments to shareholders
  • Debt repayments: cash payments to lenders for money borrowed

If this calculation looks tricky, don’t worry. Most cloud-based accounting software will create cash flow statements for you. Xero’s cash flow calculator is also available to help you better understand how much money is moving in and out of your business.

Strategies and tips for using cash flow financing effectively

When to consider cash flow financing

Financing cash flow products aren’t something you should use constantly. Ideally, your income from sales should sustain your business. But of course last-minute bills and emergency payments can knock you off course.

When you haven’t got enough available cash to cover costs, a cash flow financing product can help you through.

You can also use cash flow financing strategically – in times of huge growth, ahead of large projects that need extra funding, or when seasonal fluctuations mean you’re short on sales.

Before selecting a cash flow financing product, make sure you run some reports and projections to assess the current and future state of your finances. Cash flow statements and projections are your best friend here; they tell you exactly what’s available in your business (and what’s up ahead).

Maximising the benefits of financing activities

  • Check the terms: cash flow financing can be costly. Always read the terms and review the interest rates before committing. If you default on a payment, interest costs can quickly stack up.
  • Match the product to your needs: think about the most suitable type of financing before choosing a product. For example, if cash flow financing is a one-time thing for your business, revolving credit may not be the best option.
  • Keep accurate records: tracking all expenditure and income will help you maintain a clear picture of cash flow. You want to know everything that’s moving in and out of your accounts, so you can prepare for gaps or make the most of higher income.
  • Check your cash flow regularly: an unpaid invoice or huge sale has an immediate impact on your cash position. Keep an eye on your cash flow and create forecasts and reports often to stay on top of your money.

Read our guide on managing cash flow for more actionable tips.

Cash flow financing can help you keep your business moving when you’re in a tight spot. But using products responsibly is key. Make sure you review the cash flow financing section of your cash flow statement regularly and create projections to get a glimpse of what’s up ahead.

Cloud-based accounting software like Xero makes checking your cash position easy. With beautiful, simple-to-read reports and projections, it’s easy to stay on top of the financial health of your business. For more guides and support, check out our content hub, which contains plenty of cash flow tips for small businesses.


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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