Whether you own an upscale boutique, serve as head chef at your own bistro or run a bookkeeping service, one thing is certain—it takes a steady supply of cash to keep your business up and running. When you need to purchase inventory, pay employees or replace a piece of equipment, if you don’t have enough reserved, it may be time to borrow.

And while getting a bank loan may seem like the best choice, there’s one potential snag. Generally, you need a good personal and business credit score to get approved. If your business’s credit file is thin or your personal credit is spotty because of some past slip-ups, short-term debt can be an alternative way to satisfy your funding needs.

Short-term debt and credit

Personal credit scores and business credit scores are two entirely different things. However, both are important when you’re applying for a long-term business loan. Whether you’re going through the Small Business Administration or just getting a business line of credit from your local bank, your credit scores carry a lot of weight in the final approval decision. The lender uses your credit to gauge your ability to pay off what you’ve borrowed over the loan term.

Short-term debt uses other criteria in addition to your business or personal credit to measure how much of a lending risk you are. Take a merchant cash advance, for example. With this type of financing, you’re borrowing money against your business’s daily credit card receipts. As long as you can demonstrate sufficient cash flow, the lender’s not going to penalize you.

Something like invoice or inventory financing works in a similar way. With invoice financing, your outstanding invoices serve as collateral for the loan. As long as the lender has no reason to doubt that you’ll be paid for those invoices at some point, bad credit’s not an automatic disqualifier for a loan. Inventory financing uses the value of inventory your business has on hand that you plan to buy as the collateral and again, a lower credit score isn’t a deal-breaker.

Who is short-term debt appropriate for?

The most important thing to keep in mind about short-term debt is that it’s meant to be repaid quickly. Instead of making payments over a number of years, you may be obligated to repay the loan within a few weeks or months.

That being said, some businesses are better-suited to be short-term borrowers than others. For instance, let’s say you own a beachfront souvenir shop that only operates during the spring and summer months. Using inventory financing to stock up on sunscreen, beach towels and other tourist buys might make sense. As soon as the inventory starts to sell, you can pay it off.

Restaurant owners are also prime candidates for short-term financing, especially when credit is an issue. If you do credit card sales on a regular basis, you could use that as leverage to qualify for a merchant cash advance. Having that option certainly comes in handy if you need money for a new range or you’re hoping to open up a second location but you’ve been turned down for a traditional loan due to low credit scores.

Additional requirements for short-term financing

While poor credit may not be a barrier for short-term debt, you shouldn’t assume approval is automatic. There are still certain minimum guidelines you’ll need to meet before a lender will hand over the cash. Some of the factors they can consider include:

• Length of time you’ve been in business
• Annual business revenue
• Profitability
• Business cash holdings
• Outstanding debts
• Unpaid invoices

 

Researching different short-term debt options is important so you can find the best fit for your business. Even more importantly, be sure to read the fine print in full before signing on the dotted line. You need to be clear on how much short-term financing will cost to ensure that the expense doesn’t diminish your business’s bottom line.

Strategic Funding provides needed operating funds to small businesses. Strategic Funding has helped business in hundreds of industries.  Industries served include: restaurants, personal services, construction, medical, manufacturing, agriculture, retail stores, automotive, and food stores.