Short Term Financing Heres Everything You Need To Know

Jan 06, 2022 - 12:40 PMAuthor - Kenneth Jackson


Every business owner reaches a point where they need external funding to support the business. It can be for expansion purposes or to clear existent expenses, how you can accumulate funding lies on your business requirement and multiple factors. 

First, you need to consider your business type, goals, and the current situation it is in. Applying for business investment is daunting and takes up a lot of time. To ensure your efforts are paid, create a meticulous plan beforehand, and be aware of the other options. 

When to look for short-term financing plans?

The finding of short-term finances depends on why the SME requires short-term funding. 

The majority of loan providers or financial institutions will ask for the cause your business needs trade finance. Plus, you will utilize the funding properly, if you have a plan to act on it. 

Here are some probable causes for business funding:

1. To expand the business

2. To settle an existent monetary casualty

3. To help with cash-flow issues

4. To sustain a bad business season

5. To waive off monthly repayments 

Long-term finance vs short-term finance: Which is better?

To be precise, both of these financing options are helpful but in different circumstances. Like, if you are a small business looking for a minor investment to cover expenses or sustain a bad business session, short-term finance can be a reliable option. 

However, they are quite pricey because they include high-interest rates on the loan amount. On the contrary, long-term finances are best for a large investment value, if you are seeking extended assistance long-term finance is the appropriate option. 

Advantages of short-term financing

1. Immediate permit Businesses that need a short-term loan, generally get approval within 24 hours or a few days is extended for quality background check. Long-term loans are hard to get because the approval process is stricter and often takes weeks at stretch. Sometimes, even the loan request gets cancelled but in the short-term, a person having a credit score low as 650 can also avail of the short-term loan. 
2. All-time availability - Short-term loans are available for all business types. Lenders are more flexible while offering investment and look at the business assets to ensure timely returns.
3. Minimal paper-work required - As the prerequisite of availing short-term loan is less, even the required documentation is limited. Business owners managing various companies can easily get funds and concentrate on business growth. 

Disadvantages of Short-term financing

1. High-interest margin - The easy accessibility of short-term loans gives out high-interest rates. These loan amounts can lead to huge debts and can disrupt cash flow. Businesses must proceed with a plan to repay the debt amount.
2. Increased risk factors - If a business owner takes up a short-term loan to cover production expenses, it is easy to get into the cycle of fetching loans every month. This pattern can make a firm go bankrupt within months. 

5 common types of short-term financing 

1. Short-term business loan - Generally, a short-term business loan is used for working investments like handing out salaries, daily operations expenses and more. 

These loan amounts are smaller and can be available for months to years, depending on the lender and are processed by a lender’s firm or financial institutions. The business will be receiving the sanctioned amount at the start and then have to pay the debt with allotted interest on the scheduled payouts

2. Equipment finance - Equipment financing is also a small business loan that works great for huge investments or pricey equipment. This loan requires the equipment you are investing in as collateral. 

This makes the loan secure and cheaper for business owners. There are various types of equipment financing like paying in advance, rent before purchase, for a specific time frame or monthly.

3. Equity finance - If you are a startup and want to expand, equity financing is just for you!
Equity finance means offering your company‘s ownership in exchange for funds. Businesses must sell their share to the stock exchange to gain capital.

The funds are raised faster, but you have to share your sole ownership with others.

4. Line of credit - Line of credit ensures your business will have access to direct credit whenever in need. Like a credit card, you need to pay for the things you got and pay interest on that very amount. This loan type does need some personal guarantee object, but it is more feasible than any available loan option. 

5. Invoice finance - This type of finance suits B2B businesses that work on clients and send invoices. If your business is witnessing low cash flow, invoice financing enables the company to use invoices as collateral and get the loan amount. 

In this loan type, you need to send the invoice to the lender; they will pay 50-90% of the invoice amount. 

Now You Know!

As a business owner, you need to keep yourself updated with current finance-related news. However, while you now have access to all the tools to get the right funding for your business, we suggest you get proper financial assistance while seeking such loans. Also, don’t forget to calculate APR before applying for any loan. 


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