Short term finance options abound for businesses that need capital to meet immediate financial needs. Along with business loans, there are other ways to obtain working capital outside of what’s offered by traditional financial institutions. So, if you need short term business financing to improve cash flow or for another reason, consider these options.
1. Short term loan
Term loans are exactly what they sound like: a business loan repaid over a set term. These loans have fixed or variable interest rates, with varying borrowing limits.
A short term loan could help fill cash flow gaps or cover working capital needs. For instance, this type of financing could cover your payroll costs during the slow season or stock on up inventory. Short term loans are typically designed to be repaid in a year or less, though some lenders offer terms up to 36 months.
2. Merchant cash advance
Merchant cash advances offer a convenient way to acquire working capital for businesses with less than perfect credit. A merchant cash advance isn’t a traditional business loan. In fact, it’s not a loan at all. Instead, you receive an upfront sum of cash in exchange for a percentage of your future sales.
This type of financing may be appropriate for newer businesses that lack an operating history or strong credit. The caveat is that merchant cash advances can be more expensive than other types of short term business financing.
3. Accounts receivable financing
Accounts receivable financing allows businesses to leverage their outstanding receivables for a loan. There are two ways this type of financing can work. First, the accounts receivable financing company could lend you money based on the value of your outstanding invoices. You’d then pay the financing company back, along with a fee or factor rate. The other option is selling your outstanding invoices outright to the financing company. Then, it’s up to the lender to collect on those invoices from your customers.
In each case, this type of financing can be convenient for business owners. It’s possible to get funding in just a few business days. Like merchant cash advances, perfect credit isn’t required. It’s important to consider the factor rate and fees, however. This way, you understand what this short term business financing is costing you.
4. Inventory financing
Inventory financing is a short term financing avenue that product-based small businesses might consider. This type of financing offers working capital to purchase inventory. The inventory serves as collateral for the loan.
Here’s the idea: You should start repaying the loan fairly quickly as you sell the inventory you purchased. Inventory financing is interesting if you come across a great deal on inventory that you’d like to take advantage of. Alternately, you could use inventory financing to stock up for the busy season when cash flow is slower.
5. Business line of credit
A line of credit can offer flexible financing for the short term. With a business line of credit, you have a set amount of money you can borrow against. As you pay back what you borrow, you free up available credit.
This business loan alternative is attractive if you only want to pay interest on the amount of credit you’re using. With short or long term loans, you’d pay interest on the entire amount borrowed. A business line of credit generally requires a good credit score to qualify; the better your credit, the better your interest rate.
6. Trade credit
Also called vendor or supplier credit, trade credit is another way to bolster cash flow temporarily. With trade credit, your vendors allow you time to pay for products or supplies, instead of giving them cash on delivery. For example, payment may be due on Net 30 or Net 60 terms.
An advantage of using trade credit for the short term is that your vendors may charge little or no interest. In turn, this can be a helpful way to establish your business credit score and history if you’re able to report vendor tradelines to business credit bureaus.
7. Business credit cards
A business credit card isn’t the same as a business loan, but it can work well for short term finance needs. A business credit card is similar to a line of credit. You make purchases against your credit limit; as you pay them off (with interest), you free up available credit for new charges.
Also, a business credit card may be easier to qualify for than a business loan. Credit card companies typically check your personal – not your business – credit score. Many business credit cards also offer the opportunity to earn valuable rewards in the form of miles, points or cash back.
When comparing short term business financing, cover the basics. Check the interest rate and fees, repayment terms, whether any collateral is needed and the minimum requirements to qualify. This way, you’ll find the best short term finance solution for your business.