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The truth about short-term financing and how it can help your business

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Short-term financing is exactly what the name says. It’s a type of business funding you get for a short period of time and have to pay off. And it’s a financing option that many companies often need to overcome cash flow problems, which are responsible for 82% of small business failures (Business Insider). Short-term financing has a variety of benefits but also many risks. If you want to benefit from it instead of putting your business under an impossible debt, you need to understand when this kind of funding is appropriate.

Short-term financing: types

It’s rather easy for a small business to secure short-term financing because there are many types of it available. Therefore, something is sure to work out well for you. The most popular types are:

  1. Online loans.
    These are regular loans provided by a variety of lenders, which you can secure within 24 hours or even less. They are very convenient due to the simplicity of the approval and lending process.
  2. Merchant cash advances.
    Merchant cash advances aren’t loans in the traditional sense. Instead they are advance payments that financing providers offer businesses, which repay them through a percentage of sales. The payments are daily and there is also an additional fee involved.
  3. Business lines of credit.
    This method of short-term financing is the most affordable because you can negotiate a small interest rate. However, business line of credit might require collateral and it’s not available for all companies.
  4. Invoice financing.
    You can get invoice financing if you have an outstanding invoice to act as collateral. In this case, you should be able to secure an advance of the equal size. But you’ll have to pay a fee, so you will lose some money in the end.

Overall, short-term loans are the most popular type of financing because they are very easy to obtain. And when used wisely, they can help improve your business’ credit history.

Best uses of short-term financing for small business

The main use of short-term financing is getting ‘working capital’. This means the money to cover everyday costs, thus preventing or resolving cash flow issues before they ruin your company. Because of its importance, you have to choose the best sources of working capital financing. Terms of the available loans differ quite a bit, so you need to find the provider that will work best for your current situation. Pick only trusted lenders recommended in reviews.

The second common use for short-term loans is equipment financing. You should use this option if equipment upgrades are a necessity for business’ success. However, unlike the working capital issue, equipment might not be high enough on the priority list to merit this kind of loan. You’ll need to perform a though risk analysis to decide whether to go with short or long-term financing for this.

Other good uses for short-term financing are emergencies and improving credit. However, if you go with the latter, you have to be 100% sure that you will be able to pay the loan off without a hitch. If necessary, you should consider saving up first so you can repay the debt even in case of emergency.

Short-term financing pros and cons

Short-term loans are a good solution for many immediate business troubles with cash flow because it’s:

  • Easy to secure.
    You can get a loan online by completing a simple form and providing the bare minimum of information. You don’t have to provide business plans or even state the purpose of the loan.
  • Available despite poor credit.
    Even if your business doesn’t have the best credit, you will be able to get some short-term loans and use them to improve it.
  • You can have hard cash on your hands within a few hours, which is perfect for emergencies.

On the other hand, short-term business loans always have high interest rates. Regardless of how good your credit is, this type of financing will not be as affordable as a long-term loan. And because of this, there is a high risk of getting too deep into debt. Therefore, you should never use this type of loans if you aren’t confident in your ability to repay them. And to determine that, you’ll need to analyze your business’ profitability over the last 6 months at the least and calculate if you can handle the high interest rates.

Never use short-term loans for anything but absolute necessities. The only exception to this rule is the situation when you use them to deliberately build up your credit.

Short-Term Business Financing: Conclusion

It’s true that short-term financing can help your business in a variety of situations. It’s indispensable for emergencies and can be a powerful tool for overall credit improvement. However, you shouldn’t forget about the perils of short-term loans, which are concisely summarized by Entrepreneur. Go over those every time before you apply for getting into this kind of debt. Be realistic when evaluating your situation and make the final decision based on that.

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