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Short-Term Financing Options for your Small Business

(Credit: Bigstock) cafe owners in front  of shop
January 22
7:49 PM 2020

Small businesses are crucial for any economy and especially for the local work force. The entire community benefits from the success rate of these small enterprises. If you think about it, you'll see that either you or your close ones work for such a business. Unfortunately, chances are you hear them complaining things aren't going well. A small business is more likely to struggle financially than a major company. But the financial market has adapted to all needs, so there are options for all levels. In this case, simple solutions like short-term business loans are the best idea.

Why Are Small Businesses Important?

Small businesses are the way local communities develop. Locals know exactly what are the specific needs of their area and can provide the best offers. In addition, they create jobs that are essential to the market. Big corporations are great, but not everyone can work in one. Besides, employees seem to be more driven to do a good job when they are working in a small and tight business.

Why Is Short-Term Financing a Good Idea?

A small business doesn't usually need huge sums to grow or get over a difficult period. So, it makes sense to choose a type of loan that covers that need and doesn't take many years to pay back. This is also called working capital financing and usually aims temporary gaps in the budget. Whether you have a seasonal business or your clients just take their time paying their bills, you may need help keeping a steady flow in your finances.

What Is Short-Term Financing Used for?

All kinds of businesses need financing at some point, and a short-term solution has obvious benefits. Whether you run a seasonal business or need to expand by hiring extra staff or renting more space, a short-term loan can help you. It may also be necessary if you are going through a difficult period and have trouble with the payrolls or some debts. Buying inventory and investing in advertising are other examples of situations where you may consider this type of financing.

What Are the Best Options for Short-Term Financing?

The market offers many options when it comes to short-term financing, and most of them don't come from banks. Private lenders are usually preferred by small businesses because they have lower requirements and faster approval time. Based on your specific needs, you may want to consider one of the following sources:

  • A business line of credit is a good option because you can access funds as needed, so it's great for covering unexpected gaps in your budget. You can access the money immediately, but you may also face some additional charges, like an annual renewal fee.
  • A short term business loan can also be helpful because it doesn't require any collateral. The advantage is that you can borrow considerable amounts at reasonable rates. On the other hand, there are some strict conditions you need to respect.
  • A merchant cash advance is another way to solve your temporary cash flow problems. But you are basically giving the lender access to your future credit card revenue, so be sure you really need it.
  • Trade credit can be an option but only for certain types of businesses. It means buying things and having an extended period (usually about 28 days) to pay for the merchandise. It can be a useful tool in keeping your budget balanced.

Pros and Cons of Short-Term Financing

Owing money to someone is never a very happy situation. But businesses usually need external funding to keep growing, especially small ones. There are some clear advantages to short-term financing, as well as some unavoidable negative aspects.

On the one hand, short-term business loans are approved faster, and you can even have the money available on the same day. Believe it or not, you will actually pay less interest. Although interest rates are usually higher in short-term financing, especially if you have no collateral, the period is much shorter so overall, you will be saving money. These loans can even help your credit score, as they are easier to pay and create a positive history for you.

On the other hand, a short-term loan can be expensive and have very strict monthly payments. And if things are really tough and you cannot make the payments on time, it will affect your credit score. Even if everything goes well there's the danger of becoming 'addicted' to borrowing money. External financing is a great idea, but only when it's absolutely necessary.

Is Short-Term Financing the Right Solution for My Business?

The first thing you need to do is make an accurate assessment of your situation. Identify how much money you need and why. If you are planning a long-term business effort then you need other sources. If you are dealing with cash flow problems or part of your equipment needs to be repaired or replaced, then you are on the right track. Basically, short-term financing is meant for a temporary or seasonal problem. You get back on your feet and quickly pay off the debt to get back to normal as soon as possible.

Conclusion

Small businesses are essential for the local economy and workforce. But running a small business can be very challenging. There are clear limits to what the owner can control, and hard times are bound to come every now and then. Or things are going well, and they may want to expand their business. Either way, short-term financing options can be the right solution. The main concerns are choosing the right source and making sure they can handle the payments. Once the funds are in, it's back to business as usual and hopefully, the need for external funds won't return very soon.

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