Modern short-term financing solutions: What are the best options?
If you’re a small business owner needing quick access to flexible capital and funds, consider applying for modern short-term financing solutions, which include revolving lines of credit and hard money loans. Invoice factoring/financing can also be an ideal option.
Having access to quick business funding is key to the survival of your enterprise, as a lack of it is one of the top reasons many businesses go under and close.
As BizReport points out, one in five small firms fails within their first year, a rate that increases to 50% within the first five years. It further notes that a lack of capital and cash flow are among the primary concerns of many businesses.
By understanding your small business financing options, you can make more informed choices that can help protect your firm’s financial health, stability, and profitability.
How Does Short-Term Financing Work?
Short-term financing options are small business loans or other forms of credit that provide organizations with immediate or quick access to working capital solutions. Some require security (also called secured loans or credit) while others don’t require collateral (also called unsecured loans or credit).
Both secured and unsecured short-term loans and credit often have fewer requirements and shorter processing times than conventional or long-term loans and credit. The application process for some can even be entirely online, offering convenience and discretion.
In exchange for the fast, convenient, and more straightforward loans or lines of credit they provide, however, short-term financing providers usually charge more fees or higher interest rates than traditional banks or credit unions.
Why Would a Company Use Short-Term Financing?
One of the primary reasons companies use short-term financing is to manage and bridge cash flow gaps. Such issues can occur due to slow-paying customers or when a business has to pay rent, employees, or inventory purchases but is still waiting to receive client invoices.
Covering unexpected expenses is another reason businesses turn to short-term financing.
Unforeseen or unscheduled equipment maintenance or repairs are prime examples. As the TWI Institute explains, they’re highly common scenarios, with equipment failure accounting for 80% of unplanned downtime in the manufacturing sector, for instance.
Downtime, particularly the unplanned type, can lead to costly repercussions, from damaged customer trust, idle labor, and missed deadlines. Businesses can mitigate the impact of these consequences by using short-term financing to cover scheduled and surprise expenses.
Businesses that face seasonal fluctuations may also consider using short-term financing to cover the cost of increased inventory or temporary staffing demand.
What Are the Best Options for Short-Term Financing?
Whether you’re still in the planning phase of starting a business, have only recently started one, or are in the process of growing one, you have several options for modern short-term financing solutions, from revolving lines of credit to hard money loans.
Understanding how each one works can help you determine which small business funding is most ideal for your situation. It can also help you avoid getting into a “debt trap.”
Revolving Lines of Credit
Revolving lines of credit are like credit cards in that they provide flexible, pre-approved borrowing limits. You, as a business owner, can tap into the account by drawing funds if and when needed. You then repay whatever you borrow, and keep using the credit without having to start a new application.
Revolving lines of credit are among the most popular short-term financing options for small businesses, given that they provide on-demand access to funds. They can also be cost-effective, as they only charge interest on the amount that you draw, not the entire credit limit.
According to the Brookings Institution (Brookings.edu), a study conducted by the Federal Reserve found that 34% of employer firms that use financing regularly also use lines of credit on a regular basis.
Hard Money Loans
Hard money loans are short-term loans that require real estate, a “hard asset,” as collateral. Unlike traditional loans, which approve applicants based on credit scores, their approval hinges on the property’s value. It’s also for this reason that they take less time to process.
Real estate investors who need quick access to capital often use these loans, as explained by this guide on hard money lenders for beginners.
Invoice Factoring/Financing
Invoice factoring/financing is another type of secured funding, offering business owners a short-term, asset-based solution in which they can get immediate cash using outstanding customer invoices as collateral.
The percentage you can “borrow” against outstanding invoices depends on the lender, but it can range from 70% to 90%. You must then repay the loan within 30 to 90 days, depending on your agreement with the lender.
Since invoice factoring/financing provides immediate funds, your business can use it to:
- Manage cash flow gaps
- Meet payroll requirements
- Cover expenses
Frequently Asked Questions
How Does Long-Term Financing Differ From Short-Term Financing?
Long-term financing programs provide businesses with larger loan capital. Because they grant borrowers access to more funds, they also provide longer repayment periods, usually ranging from three to 25 years or more.
The longer repayment period often equates to lower interest rates and monthly payment amounts. The larger capital that you can borrow, however, also means these small business loans have stricter requirements, such as good to excellent credit scores.
Are Short-Term Financing Solutions Difficult to Qualify For?
Short-term financing programs for small businesses are usually easier to qualify for than traditional loans. Their requirements are often less stringent, such as lower credit score thresholds.
Options with mandatory collateral (e.g., hard money loans and invoice factoring/financing) can even be more straightforward than their unsecured counterparts. They prioritize the value of the security over the borrower’s creditworthiness.
Collateral also makes lenders less worried about recouping their money, as they can seize and use the security if the borrower defaults. Since secured lenders have this “back-up,” they’re more likely to qualify borrowers with valuable assets.
Explore Modern Short-Term Financing Options for Your Business Today
Modern short-term financing solutions for businesses, such as revolving lines of credit, hard money loans, and invoice factoring/financing, can give your business quick access to funds. You can then use the money to bridge cash flow gaps or shield your business from the consequences of downtime.
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