Short Term Finance Options for Small Businesses
From expanding your operations to financing your day-to-day expenses, businesses may need loan when cash does not suffice. Before taking the first option that comes, realize that not all loans are the same.
All of them are financial instruments having different purposes. It is important to assess what your business first to determine which best fits its needs. One of your finance options is a short-term loan.
What is a short-term loan?
A short-term loan is a kind of loan that allows you to borrow a set quantity, for a very short period of time. Usually, its maturity does not last for more than a year. However, the amount that will be awarded to you is usually smaller compared to long-term loans which can last decades.
What are its advantages?
Entrepreneurs, businesses, and other individuals are easily attracted to this because the requirements are not as stringent, thus making it easy to obtain.
Moreover, aside from the big banks, short-term loans are also offered by other creditors such as the smaller banks, online lenders, and credit unions. Therefore, you have more options and you can shop around to find the best deals.
What are it disadvantages?
Short-term loans have higher interest rates compared to long-term loans. Aside from the prime interest rates, they add a few points up based on their assessment of the risk associated with your business. As they tend to earn more in interests with traditional loans, it makes sense to up the rate on its polar opposite.
Aside from that, it tends to increase business spending. Because you have to pay the loan immediately, it can easily dent your revenues. Because can easily access this type of loan, it can be tempting to take out one after the other.
What affects its interest rates?
Aside from the risk associated with your business as mentioned above, the interest rate of a short-term loan is affected by the economy.
In a good economy, it tends to be significantly higher than its long-term counterpart. However, when in a recession, the interest rate decreases.
This happens as a result of supply and demand. Interest rates are generally a reflection of the market’s savings rate.
As people are more inclined to save than to consume during recession, the demand for loans decreases. In turn, interest rates decrease as well. The opposite happens when the economy is booming.
What are the purposes of short-term loans?
- Income stream issues
When business is slow and you need to augment your income for expenses, you can use a short-term loan to keep things going. As this problem is aimed to be resolved immediately, a long-term goal is deemed unnecessary here.
- Business expansion
If you need upfront capital for expanding your product line, opening up a second store, or trying new modes of advertisement, you can apply for a short-term loan. An expansion indicates some form of success. Thus, only a short-term loan is needed as you expect that you will get its returns quickly.
- Seasonal trends
Some seasons such as Christmas and Black Friday sale require more products and staff that your business usually needs. If you feel you will be unable to fulfill the demand, you can get a short-term loan. This can cover salaries and extra inventory for the shopping rush.
Even with good insurance, some unaffordable tragedy will still hit you. In such unfortunate events, you can rely on a short-term loan to cover the expenses while your business recovers.
What are the short-term financial options for your small business?
Enumerated below are short-term financing options including loans and other methods of gaining funds for the business.
- Working capital loans
While generally an unsecured loan, businesses with little to no credit history will be required to put up a collateral to be qualified. The amount your business gets from this can be used to fund daily operations. With the loan term ranging from 30 days to one year, you can get approved for a balance from $30,000 to $5 million.
- Accounts receivable financing
With the typical loan term lasting 30 to 90 days, an accounts receivable financing is secured by the business’ accounts receivable. Here, the balance is paid off as you receive revenue from clients. Here, you can get approved as soon as within 24 hours for up to 90% of the outstanding invoices. Aside from the variable interest rate, surcharges include 2-3% processing fee.
- Small business line of credit
Although typically not considered a short-term loan, it is included here as you have to option to terminate the agreement and pay the remainder of the balance in full in just one year. Initially, you will be charged a processing fee amounting to 2-3% of the total approved balance. This will give you full access to a capped balance which will not earn interest until withdrawn. If you want to extend your line of credit, there is an annual renewal fee which you have to pay.
- Invoice financing
Invoice financing is selling your business’ unpaid invoices at a set but lower amount. After these are sold, you will be sold a fraction of total balance, depending on what both parties have agreed upon. Then, after it is paid, you will be awarded the rest of the amount.
A related version of it is invoice factoring which has one main difference from the first option: you get the full agreed amount right away. In all other ways, they are the same.
- Equipment loan
Although it can be long-term as well, it is possible for an equipment loan to mature in only six months if the amount borrowed is not that substantial. Here, the equipment itself serves as the collateral. With interest rates ranging from 8% to 32% it can be manageable with good credit rating.
Do you have a short-term need that can be addressed by a short-term loan? Look into the options listed above, and decide for yourself which fits the needs of your business the most.
Anne is a Senior Author for SBL. She began her career as an independent consultant for local businesses after graduating with a BA in Management. Since that time, she’s expanded to writing as well as consulting to spread helpful knowledge to small business owners across the country.