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Short-Term Financing Sources for Small Businesses

Running a business is a strategic game with short-term (daily operations) and long-term (future goals) planning. Similarly, small businesses need short-term financing for immediate needs and long-term financing for big investments – a balance of quick fixes and lasting support. Continue reading to learn about the different short-term financing solutions available for small businesses based in and operating in the United States.  

What is short-term financing? 

Short-term financing is a quick cash lifeline for small businesses looking to cover immediate needs – whether that’s buying inventory, managing daily expenses, or handling unexpected costs. Short-term financing is a practical solution for entrepreneurs navigating the financial ups and downs of running a small business without jeopardizing its long-term stability.  

Short-term Financing vs Long-term Financing 

Short-term financing is an immediate cash solution with repayment terms usually lasting up to a year. Small businesses opt for short-term solutions to handle daily operation costs, navigate cash flow issues, or seize sudden opportunities. Long-term financing is used for large investments that stretch beyond a year. When it comes to choosing between short and long-term financing, it all comes down to how fast you need the money and how fast you are willing to pay it back.  

Short-Term Financing Sources for Small Businesses 

SBA Microloans 

The SBA microloans program, offered by community-based lenders and the Small Business Administration, provides funds for small businesses up to $50,000. Collateral requirements vary and personal guarantees are often necessary. These loans support working capital or asset purchases. The distinctive feature of the SBA microloans is their extended repayment period, allowing a maximum of 6 years of flexibility. However, there is a tradeoff; the application and loan disbursal process can be time-consuming. Despite the wait, the program provides crucial financial assistance for small businesses.  

Trade Credit 

Trade credit is a form of short-term financing that allows businesses to obtain goods or services without any upfront payments. Instead, the payments are deferred to a later date, known as net terms. This can help small businesses improve their cash flow as businesses can use the acquired goods and services before paying. The main benefit of trade credit is being able to obtain access to necessary resources. However, it is crucial to honor the repayment terms to maintain a good relationship with the suppliers. If trade credit repayment is delayed, small businesses can potentially harm their future credit terms. 

Lines of Credit 

Lines of credit for small businesses offer flexibility in borrowing and repaying funds. To get one, you’ll need a decent credit history and solid business financials. Banks may let you renew the cred line and offer different options on how to pay it back. The benefits of a line of credit generally include a lower interest rate compared to business credit cards. A line of credit allows small business owners access to funds on demand.  

Short-Term Business Loans from Online Lenders 

Short-term business loans from alternative lenders are financing solutions designed for quick fixes. Short-term loans usually have a straightforward application process when compared to traditional avenues. Alternative lenders are often more forgiving on eligibility requirements, focusing on your business performance rather than an endless list of qualifications. Other advantages include a speedy approval and funding process, with the loan durations ranging from a few months to a few years. There’s often no need for collateral if a personal guarantee is offered, making these loans more accessible for small businesses. To apply for a loan from an alternative lender, simply fill out a form with a few basic business and financial details.  

Secured Bank Loans 

Secured bank loans mean you’re putting assets on the line. With secured bank loans, you pledge specific assets as collateral, ensuring the bank has a safety net in case things don’t go as planned. Commercial banks and commercial finance lenders are the go-to spots for secured short-term loans. Commercial banks like Wells Fargo or JPMorgan Chase, and commercial finance companies such as Crest Capital are popular options for secured bank loans for small business owners across the United States. Eligibility typically involves showing your ability to repay and detailing the assets you’re willing to pledge. The main benefit of a secured bank loan is that the interest rates are significantly lower than unsecured loans. The risk is losing your assets if you can’t meet the repayment terms. 

Accounts Receivable Loans 

Accounts receivable loans let businesses turn outstanding invoices into immediate cash. Instead of waiting for clients to pay, businesses borrow against the value of their unpaid invoices. The loan can be repaid in two ways: once your invoices are collected or sell the invoices to the lender, letting them handle the collection process. Accounts receivable loans can be a great way to unlock cash tied up in invoices and maintain liquidity for operational requirements without the wait. However, fees and interests can add up, making it one of the pricier financing options on this list.  

Merchant Cash Advance (MCA) 

Merchant cash advances are a fast form of short-term financing where a business receives a lump sum upfront in exchange for a percentage of its future credit and debit card sales. The key perk of the merchant cash advance option is flexibility. There’s no fixed repayment date or interest rates, making it an attractive option for businesses with fluctuating income. However, the catch lies in higher fees. While the lack of set repayment dates can ease cash flow pressure, the overall cost can be steep. Businesses considering merchant cash advances should weigh the benefits of convenience against the overall expenses.  

5 Considerations for Choosing Short-Term Financing Sources 

1. Monthly Payments & Repayment Terms 

Short-term financing sources such as secured bank loans, lines of credit, and short-term business loans often come with higher monthly payments due to their shorter loan terms. The shorter the loan term, the quicker you are expected to pay it back. This makes it critical for a small business to choose short-term financing with reasonable monthly payments that the business can afford. Choosing the right repayment structure depends on your business’s cash flow patterns and preferences for flexibility. Here’s a comparison of the different types of repayment that may work for your business:  

  • Revolving payments: This method offers flexibility where you repay based on what you have used. This payment method is ideal for lines of credit.  
  • Monthly or biweekly payments: Common for short-term business and secured loans, providing borrowers with a repayment schedule.  
  • Lump sum repayment after invoice is paid: This payment is associated with accounts receivable financing. With this payment method, small businesses can repay once the customer settles the invoice.  
  • Percentage of future sales: This repayment method is tied to the business’s daily credit and debit card sales. Instead of a fixed, scheduled payment, businesses are required to agree to repay a small percentage of the daily credit and debit card sales. 

2. Access to Funds & Loan Term 

When we talk about “access to funds” it’s all about how quickly you can get your hands on the money you need. “Loan term” is how long you have before you need to pay back the borrowed cash and added fees.  

When you’re on the lookout for short-term financing, try to aim for a lender who is not only speedy with getting you your capital but also gives you room to discuss repayment terms. 

3. Interest Rates 

Interest rates can affect the overall cost of borrowing and the affordability of the loan. Essentially, the interest rate is the money you pay on top of the borrowed sum. Interest rates can be fixed (same) or variable (changes).  

Short-term loans usually come with higher interest rates than long-term loans. Choosing a loan with a reasonable interest rate is key to keeping costs down and making the loan manageable. If rates are too steep, consider offering lenders collateral to negotiate interest rates.  

4. Credit Score Requirements 

Having a higher credit score significantly boosts your chances of getting approved for a business loan and can even snag you better terms because it tells lenders you’re reliable with your solid history of paying back what you owe. Credit score requirements can vary among business lenders and depend on the type of financing you’re seeking. Here’s a general breakdown:  

  • Excellent Credit (750+): Typically qualifies for the best terms and lowest interest rates across all types of financing options.  
  • Good Credit (700-749): Likely to qualify for favorable terms and low interest rates, though not as exceptional as an excellent credit score.  
  • Fair to Average Credit (650-699): Some lenders may accept this score but will most likely face high interest rates.  
  • Poor to Below Average Credit (below 650): May encounter challenges with traditional lenders.  

5. Personal Guarantee & Collateral 

Collateral and personal guarantees can play a crucial role in securing short-term loans, impacting both approval and terms.  

Collateral: any tangible assets like real estate, inventory, or equipment that you pledge to lender as security for the loan. If you cannot pay back the loan, the lender can seize and sell the collateral to recover their losses.  

Personal guarantee: A personal guarantee by a business owner is to personally pay back the loan if the business can’t. This is putting the individual’s personal assets on the line in case of a business default.  

For SBA microloans, it is common to require both collateral and a personal guarantee. This demonstrates commitment and provides the lender with assurance. Secured Loans and accounts receivable financing typically rely solely on collateral. Short-term business loans may lean toward personal guarantees.  

Your ability to offer collateral or not can impact the financial resources available to you. If collateral is on the table, then secured loans or accounts receivable may be a viable option for you. However, if you can’t offer up collateral, short-term business loans emphasizing personal guarantees might be a more suitable option. Always remember to evaluate your capacity to provide collateral and choose the financing option that aligns with your business’s goals and capabilities.  

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