Has your business hit a small bump in the road? You've got options to avoid long-term issues. Take a close look at short-term business financing.
Incurring debt is a part of small business. But your debts shouldn't keep your business behind. Short-term business finance is one of many financing options to help your business grow.
Short-term business finance loans are a means for business owners to acquire working capital. Businesses use working capital to pay for resources essential to their business.
There are pros and cons to short-term business finance. If you don't have a clear reason for a short-term loan, it's not the right option for you.
But there's business value in short-term financing as well. Let's identify some of the advantages of short-term business finance.
Is Short Term Business Finance Right for You?
Your first step is to identify why you need financing. Long-term financing is suitable for long-term business efforts. Short term financing has applications as well.
Perhaps you're starting a new initiative with startup costs. You feel strongly the initiative will deliver returns.
Pay for those startup costs with short-term business finance and watch your investment take off. The returns on your new initiative should cover the expense of financing.
Many small businesses encounter cash flow issues. Seasonal factors can slow business down. A short-term loan can pay for operations until business picks up.
Let's say some essential equipment fails. You don't have the capital for emergencies repairs. There are short-term financing options to carry you through.
Who Can Provide Short-Term Financing for My Business?
Local banks once served the needs of small businesses nearby. Today, small businesses can secure financing from companies who specialize in their industry and based upon their company needs.
Specialists offer small businesses a wide range of advantages. They typically approve loans and deposit funds right away. That's because they're familiar with the struggles that small business owners face.
These organizations form closer partnerships with their clients. They offer flexible financing and support business success.
5 Short-Term Business Finance Options
Businesses need capital for all different reasons. Specialists offer a range of services designed for these needs. Some of those needs include:
Completing a job
Paying off other debts
But what are some of the financing options available to small businesses? The following short-term business finance options are the most popular in the industry.
Working Capital Loans
Small businesses struggle with continuity during difficult times. Your assets and revenue are always at risk. These changes can do long-term damage if you don't have the capital to sustain yourself.
Working capital loans help small businesses finance daily operations. Small business owners can maintain equipment or payroll when times are tough.
These short-term loans can last from 30 days to 1 year. Some can last longer depending on the lender.
For example, traditional bank loans can last up to five years. Merchant cash advance companies have rates as high as 54%.
Some small businesses work with direct lenders. These lenders offer loans designed for their needs.
Partnering with a direct lender can increase the value of those loans. These organizations can personalize services for small businesses as well.
Unsecured Business Loans
Unsecured business loans require no collateral. The borrower's credit is the only security. Small businesses with great credit should explore these loans.
With good credit, unsecured loans can be much faster than secured loans. You also avoid the obligation of supplying collateral.
An unsecured loan can be of any type. For example, both working capital loans and equipment financing can be unsecured.
There are some disadvantages to unsecured loans. They are riskier for lenders, so interest rates might be higher than with secured loans.
Perhaps you have good credit but nothing for collateral. An unsecured working capital or equipment financing loan might be right for your business.
Equipment financing is exactly as it sounds. This type of financing is for companies that need to purchase or lease new or used equipment.
This is a highly specialized loan. Many lenders can process these loans with minimal paperwork required. Direct lenders can deliver funds in as little as 24 hours.
Equipment financing has its own standards of interest and collateral. Forbes says, "Interest rates will depend on a variety of factors, including creditworthiness, and the cost of the assets being purchased. The equipment itself can be used as collateral."
Traditional Small Business Line of Credit
A line of credit allows businesses to access funds as needed. This type of financing has both short and long-term benefits.
In the short term, a line of credit can help businesses manage cash flow and unexpected expenses. Funds are available immediately, so there is no delay during a crisis or window of opportunity.
There are negative aspects to a line of credit. Many lenders ask for an annual fee to renew the resource. If you don't pay the annual fee, you're responsible for paying the full balance right away. They will also place a blanket lien on all your assets.
Consider a line of credit if you plan on working with that lender indefinitely. Don't open a line of credit only for short-term reasons. Breaking that relationship will be costly to you.
Merchant Cash Advance
A merchant cash advance is a lump-sum payment in exchange for future revenue. Small businesses choose this option when they are in desperate need of capital.
Most experts advise against merchant cash advances. They can put businesses at considerable risk.
Nerd Wallet says, "In some cases, MCAs lead to a debt trap, where it's virtually impossible to repay and you must refinance into another -- and yet another -- MCA or file for bankruptcy."
Financers can require payment weekly or daily. Payments are often drawn directly from accounts as well. These can generate fees up to $20,000 or more.