Most business owners should learn about short term business financing. It can help with some of the financial challenges that arise with running a business.
You see, when you need added funds for your business, you’ll often come across options like lines of credit, invoice financing, or general business loans.
If you choose to get loans, you will encounter long term and short term business financing. Both of them can give you added funds but they won’t have the same benefits.
Moreover, not all loans or business financing can actually help your business. Some may even give you problems with your cash flow.
That’s why you should learn about short term business financing. Knowing what type of financing you need for your business will help you when you do seek added funds for your operations.
Choosing Short Term Business Financing
Many businesses choose short term business financing when they need added funds. But before you do the same, you need to learn how short term business financing works.
For one thing, understanding short term business financing can help you figure out if it’s the right choice for your business.
You see, choosing the wrong funding option could bring more problems than solutions. Not all loans/financing is easy to repay, which means some can cause problems with your future cash flow.
Also, some loans have a lengthy application process but have low approval rates. You could end up losing a lot of time and money preparing the documents needed for the loan, all to no avail.
In any case, let’s start learning about short term business financing now. This can help you see what types of loans may work for you and your venture.
What Is Short Term Business Financing?
Short term business financing is a type of financing or loan where a borrower has a short repayment period. Usually, you will have to pay the debt in less than a year.
But there are cases where you could also repay the short term business financing over 18 months. The length often depends on the lender and the amount of money borrowed.
Also, short term business financing is known for its easy application process. This type of financing is quicker to fund & easier to qualify for than most others.
Your chance of getting approval for short term business financing is higher than for long-term financing, on the whole. One of the main reasons for this is that it has a lower total cost of capital involved.
Since the money involved isn’t that large and can be easily acquired, business owners often use this type of financing for immediate expenses like the following:
- Working capital,
- Purchasing inventory,
- Covering cash flow issues, and
- Other problems that need quick cash.
Why Choose Short Term Business Financing
Now, many business owners still prefer getting long term business financing when borrowing. The amount of money that you can borrow can be a huge factor in this decision.
But short term business financing can be a better option in some cases.
For example, let’s say you’re looking for quick cash to borrow. Short term business financing can be the right option then because it’s faster.
Many lenders are also willing to give approval for short term business financing applications even if you have a bad credit score. Even startups can get short term financing.
It’s riskier for lenders to loan money that has a long repayment period, after all. It’s hard to predict economic trends 5, 10, or even 20 years in the future.
With short term financing, you can also borrow money immediately once your current debt is paid in full.
Types of Short Term Business Financing
There are many types of short term business financing. You can choose which one perfectly fits the needs of your business.
To give you an idea, here are the three main sources of short term business financing:
Finance Your Business Invoices
Have you ever wished you could get an advance on your outstanding invoices? Business invoice factoring companies can initiate a same-day advance on a percentage of your invoice total, directly into your bank account. Get a credit line based on the strength of your customers. As your sales grow, so can your credit limit. Your business can decide how many and which invoices to submit. Then you can fund only what you need, when you need, without long-term contracts. Invoice factoring is a fast business financing option for businesses who may be waiting for their clients to pay their invoices for 30, 60 or 90 days.
Great invoice factoring lenders will automatically sync your invoices from your accounting software or upload invoices to your online dashboard. The online business invoice factoring lender will provide 85 - 90% of the money upfront. You get the rest, minus a small fee, once the invoice is paid to the factoring company.
Businesses generally need to have over a 550 FICO score, a minimum of $10,000 in monthly revenue and over three months in business.
Here are the pros:
- Rates as low as .25%
- Approval in 24 hours
- $20,000 - 5 million in cash can come available
Here are the cons:
- Must have reputable customers paying you on net 30-90 day terms
Merchant Cash Advances
This short term business financing option is available for small businesses. This is typically the last choice by businesses.
In this type of short term business financing, you repay it directly through your credit and debit card sales. The lender will take a portion of your sales and the repayment period could be as long as 18 months.
Most lenders of merchant (or business) cash advances are online financing companies. Many merchant cash advances are also based on credit card receivables.
Furthermore, the application process is simple and most lenders can fund borrowers the same day.
Here are the pros if you’re going to choose an MCA:
- Fast payments
- Easy to qualify
And here are the disadvantages of choosing an MCA:
- High fees
- Hight interest
- Lack of business control
- Daily or weekly payments
Business Cash Advance
This option is a good one if you want short term business financing with a good bit of flexibility. That’s because it lets you borrow up to an amount defined by the lender, but you also only need to pay interest on what you actually borrow.
The best lenders set fairly high maximum amounts for what you can borrow. For example, most lenders can allow a borrowing limit as high as $250K for borrowers.
Pair those with a payment scheme flexible enough to be easy to manage and you see why this is a relatively popular option for short term business financing. Not that it doesn’t have potential downsides too, of course -- as you’ll see below.
Here are the pros:
- Fast funding
- Require few documents
- No collateral needed
Here are the cons:
- High interest rates
- Daily or Weekly payments
Short Term Loans
Short term loans work like traditional business term loans.
Your lender will give you money at the beginning of your loan. Interest will be added and you’re going to repay it with scheduled payments.
The repayment period ranges from 3 to 18 months. Though it’s a form of short term business financing, many lenders prefer borrowers with a credit score of at least 620 for this option.
If you meet the required credit score, you can typically borrow $25,000 to $250,000.
But again, before you get short term loans, make sure to determine if they’re the right choice for your business.
To help you with that, here are the pros:
- Easy to qualify
- Fast approval
- Quick payment plans
- Less paperwork
Here are the cons:
- High cycle risk
- High interest rates
If you choose short term loans, it’s best to get them from business cash advance financing companies. Unlike banks, they are not strict regarding the requirements.
Aside from that, business cash advance financing companies also offer flexible payment options. You can even arrange a weekly payment for your short term loans. There are some that will give you a monthly payment but the interest rate is insanely high but the positive side is that they will forgive the future interest but not all business cash advance companies will.
This can be a great option for most businesses. However, there may be an even better one, if you can qualify for it.
We’ll take that up next.
A Business Line of Credit is your best option
The business line of credit is the most affordable type of short term business financing.
This type of short term business financing works like business credit cards and you get monthly payments.
Some online financing companies like Trust Capital offer more benefits for a business line of credit. Here are the benefits of their business line of credit program:
- No prepay penalty
- Monthly payments
- No front-loaded interest
- All repayments are collected via ACH deduction
- Unsecured financing, i.e. no collateral required
Other than that, if their client wants to pay back early, they will pay off only the principal balance.
Once you pay all your debt, there will be no renewal process either. Funds will be replenished immediately and you can come back to take out more cash whenever you need it.
Their program also uses automated underwriting. This means the existing customer base is reviewed on a regular basis.
Trust Capital even uses automated underwriting to identify customers eligible for credit limit increase and BV Account management will actively upsell eligible customers.
On top of that, the application process for the business line of credit is also simple. Potential clients can use an online portal to sign an agreement and draw funds.
For clients that connect bank data, approval can even be generated under 3 hrs.
Here are the minimum qualifications for this financing:
- Time in business: 6 months
- Monthly revenue: $25,000
- Minimum FICO: 620
If you’re qualified, you’ll access a line of credit from which you can pull working capital. Also, you can arrange a repayment period from 3 to 12 months.
Final Thoughts on Short Term Business Financing
In this blog post, we talked about short term business financing.
It’s important for business owners to know their options whenever they need additional funds. Accounts receivable financing is a popular option if you have reputable customers paying you on net terms, short term business financing can be a good fix for a cash shortage.
Most types of short term business financing are easy to pay and to acquire. You just have to pick the right type of financing so you can make the most of it. A true business line of credit is typically the best choice for businesses.
Also, be sure to pick the right lender for short term business financing. To help you with that, contact Trust Capital at (866)458-4777.