You’ve probably considered business financing to help fund a new project or fulfill large orders. However, you might not know how important cash flow forecasting is in the approval process.
The fact is: Cash flow forecasting makes a huge difference to lenders. The more stable your business appears in the present and future, the more likely you are to get approved.
Getting a financing comes down to looking like a solid candidate in the eyes of your lending partner — the safer (less risky) your company appears, the more attractive you are as an investment.
Cash flow forecasting, like the kind offered by PayPie, gives prospective lenders a glimpse into what kind of operating capital your company has on hand and will have in the future. This demonstrates your ability to afford loan repayments, as well as the longer-term solvency of your business.
What cash flow forecasting helps you achieve
Before we dive into how cash flow forecasting maximizes business funding, let’s get into the details of how cash flow forecasting works. A cash flow forecast uses your current cash flow numbers to pinpoint strengths and weaknesses. When produced at regular intervals, such as each month, cash flow forecasts help you better predict your company’s future performance.
1. It pulls together metrics from your main financial statements
Using financial information from your income statement, balance sheet and cash flow statement, cash flow forecasting, like one created using PayPie, helps you get the full picture of your finances. It does so by analyzing these numbers and providing a highly visual, easily understood report containing relevant ratios, charts and graphs.
2. It helps you measure and set benchmarks
If you’ve set benchmarks based on previous cash flow forecasts or through your cash flow budget, each new forecast you create gives you valuable insights into how well your company performed against these benchmarks. Cash flow forecasting can also help you fine-tune your benchmarks or set entirely new ones.
3. It tells you how much financing you can afford
Another pattern or trend that cash flow forecasting helps you visualize is where you stand in terms of financing. It can tell you how well your managing existing repayments. And if you need or plan to borrow additional funds, forecasting shows you how much new financing you can afford.
How cash flow forecasting helps you determine which business financing option you need
Cash flow forecasting doesn’t just help entrepreneurs visualize how money is moving in and out of their businesses. It also helps determine what kind of business funding you need in order to reach your goals.
Small business financing products are not created equal — some, such as a business line of credit, are better suited toward recurring situations in which you might need extra capital. Others, such as a working capital loan, provide companies with a one-time payment to help pay for general expenses across the entire business.
If getting funds quickly is your primary cash flow issue, invoice factoring. provides you with an advance against the total of an outstanding invoice, giving you a lump sum in a matter of days. (If not faster in some instances.)
By helping you pick the financing that fits your needs, a good cash flow forecast can even save you money. By assessing where your financing gaps are, you only borrow what you need. This helps you save money in the long term by not paying interest on amounts you don’t need or avoiding penalties from missed payments or misaligned products.
How cash flow forecasting affects the application process
Your cash flow forecast will also be of interest to your lending partner. For them, financing is all about risk. The more proof you have that you can afford to repay debts, the less risky your company appears. Good cash flow management signals to lenders that you’re able to assume the costs of repayment. This, in turn, demonstrates that your future financials can withstand this extra financial burden throughout the payback period.
- Character: Your personal and professional credit history (past and present debts), as well as the personal profiles of you and your co-signers (your professional history, accomplishments, or other testaments as to why you’re creditworthy).
- Capacity: Your company’s ability to pay back the amount of the loan in question. Lenders want to see if your cash flow can support the additional debt and expenses associated with your financing.
- Capital: The amount of money that business owners have invested in their own company. Lenders like to see that entrepreneurs have put some skin in the game themselves before they provide you with cash.
- Collateral: What businesses can offer their lender in the event that they’re no longer able to pay back their loan. Collateral can consist of liquid assets or business equipment.
- Conditions: How borrowers intend to use their loans. For example, whether they’re using the loan to pay for raw materials or a new marketing campaign.
Cash flow forecasts impact several of your company’s 5 C’s — particularly your capacity to pay back your loan on time and without complications. They also reflect the collateral you can provide and the conditions for which you’re seeking the loan in the first place.
What else lenders look for in a cash flow forecast
Cash flow forecasts are akin to going under the hood of your company’s financial vehicle. They let lenders take a look at to review your one-off and recurring expenses, your income sources, your expectations for future financial operations, and whether or not your forecasting model is correct. In particular, lenders look at your cash flow forecast for:
- Future sales: Banks want to know about recurring revenue sources, as this demonstrates that your company is sustainable over time.
- Invoice payment timing: The timing of your accounts receivables and payables matters to lenders too, as it influences your company’s cash flow on an ongoing basis.
- Business costs: Whether or not your company has overhead issues also goes a long way in the loan decision-making process. Banks want to see how you’re spending your money, and whether or not your expenses are sustainable.
- Operational health: Cash flow forecasts demonstrate your company’s operating health. Banks want to know if you’re operating with a baseline level of success before making an investment. After all, few people want to lend to folks who can’t pay them back.
- Historical performance: As the old saying goes, history repeats itself. Your previous financial performance provides a benchmark for future activity. It also reflects whether or not you experience cyclical downturns or periods of financial instability.
There are other means by which lenders can get details on the aforementioned points. However, cash flow forecasts collate them into one document, which makes it easier to assess whether or not your business is as creditworthy as it appears in your application.
How to create a cash flow forecast
The best way to prepare an accurate cash flow forecast to maximize business funding is through PayPie’s cash flow forecasting tool. Our proprietary risk score, built into your forecast, also gives you insight into what your company’s credit looks like in near-real-time.
Just create your PayPie account and connect your business. QuickBooks Online users can start right now. And the entire process doesn’t cost a single dime.
PayPie integrates with QuickBooks Online. Other collaborations are in the works.
The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.
Images via Pexels and the PayPie Cash Flow Dashboard.