Jun 07, 2023
As a large or small business owner, you know that cash flow is essential to keep your operations running smoothly. But what do you do when unexpected expenses pop up, or you need funds for a new project or expansion?
This is where short-term business financing comes into play. Short-term financing can provide the quick cash needed to cover expenses without having to commit to long-term repayment plans.
In this blog post, we will take a closer look at short-term business financing and its benefits. We'll discuss the different types of short-term financing available, including business lines of credit, invoice financing, merchant cash advance, and equipment financing to help you determine which type of funding option is best for you.
We'll also go through the pros and cons of using short-term financing for your business needs and when it's best to use it. Lastly, we'll give you tips on how to apply for short-term financing and find the right lender for your business.
Understanding short-term business financing
When running a business, it's not uncommon to face cash flow issues or unexpected expenses that require quick financing solutions. Short-term business financing options can be a great way to bridge these gaps and maintain operations.
Compared to traditional bank loans, short-term financing often boasts faster approval and funding times. This makes it an attractive option for businesses in need of quick cash.
Additionally, short-term financing may be more accessible to businesses with lower credit scores. However, it's essential to assess interest rates and fees carefully before committing to any short-term financing option.
What is short-term business financing?
Businesses often face unexpected expenses or temporary shortages in working capital that require immediate attention. This is where short-term business financing comes in handy. Such financing refers to a type of loan or funding designed to be repaid quickly, usually within a year or less.
Short-term business financing can help businesses:
- Better manage cash flow: Short-term financing provides quick access to funds that can be used to cover operating expenses or unexpected costs.
- Fund capital investment: Short-term financing can also be used to fund capital investments such as purchasing equipment, inventory or real estate.
- Improve flexibility: Short-term financing options offer greater flexibility in terms of repayment terms and interest rates. Oftentimes, you can tailor these to meet the specific needs of a business.
- Improve their credit history: Successfully managing short-term financing can help businesses establish a positive credit history, which can help them qualify for larger loans or lines of credit in the future.
- Creates a competitive advantage: Access to short-term financing allows businesses to respond quickly to market opportunities, such as a sudden increase in demand for their products or services.
Short-term business financing also helps companies manage inventory purchases and purchase a piece of equipment. These types of loans typically have higher interest rates than longer-term loans, but they offer faster access to funding upfront and more flexible repayment terms.
Before deciding on a financing option, it's essential to weigh the costs and benefits carefully and ensure timely repayment.
How does short-term business financing work?
Short-term business financing provides a flexible and quick solution for businesses in need of extra cash. This type of financing involves borrowing a small amount of money for a short period, usually less than a year.
The loan may be secured or unsecured, with varying levels of interest rates depending on the lender's requirements and the borrower's creditworthiness. Short-term financing is often approved quickly, and repayment terms can be flexible to suit the needs of both lender and borrower.
Overall, short-term business financing can be an effective way to manage cash flow, cover unexpected expenses, or take advantage of new opportunities.
Types of short-term business financing
When it comes to short-term business financing, there are several options available for entrepreneurs especially those with new businesses and startups.
A line of credit provides a flexible option that allows you to access funds as needed, while invoice financing can be secured by unpaid invoices. Merchant cash advances offer a lump sum of money in exchange for a percentage of future sales, and equipment financing allows you to secure a loan based on the equipment you are purchasing. Finally, short-term loans provide a fixed amount of money that is repaid over a short period of time.
A few types of short-term business financing include:
1. A business line of credit
Obtaining a business line of credit can be an excellent way to access quick cash when needed, without having to go through the process of applying for a loan each time.
A business line of credit provides businesses with flexibility and control over their finances. With this type of financing, businesses can borrow up to a certain amount and only pay interest on what they have borrowed.
This means that they can access funds quickly and easily, without worrying about committing to a long-term loan or incurring high-interest rates. However, it is important to carefully evaluate the terms and interest rates before applying for a business line of credit to ensure that it aligns with your business's financial needs.
2. Invoice financing
Small businesses with long payment terms can face cash flow problems. Invoice financing provides a solution to this by allowing businesses to sell their unpaid invoices to lenders for quick cash.
This type of financing is an excellent choice for small businesses that require fast cash but may not qualify for a traditional business loan. With lower interest rates and fees than other short-term financing options, funds obtained through invoice financing can be utilized to cover payroll, inventory, or expansion expenses.
3. Merchant cash advance
For businesses with fluctuating revenue, merchant cash advances can provide quick access to funds. This type of short-term financing involves receiving a lump sum in exchange for future credit card sales. Repayment is made through a percentage of daily credit card sales until the advance is paid off.
Although this option may have higher interest rates and fees than other types of financing options, it can be an attractive choice for businesses with inconsistent or seasonal revenue. It's important to carefully evaluate the terms and fees associated with merchant cash advances before making a decision.
4. Equipment financing
In today's fast-paced business environment, staying competitive often requires investing in new technology and equipment. Equipment financing can be a great option for businesses that need to purchase or upgrade equipment but do not have the cash on hand to do so.
With flexible repayment terms and competitive interest rates, equipment financing allows businesses to spread out the cost of equipment over time. This conserves cash flow while remaining up-to-date with the latest technology. By investing in new machinery, businesses can improve efficiency, increase productivity, and maintain their competitive edge in the industry.
Pros of short-term business financing
Short-term business financing offers numerous benefits for small and medium-sized enterprises.
One of the most significant advantages is quick access to funds, which enables businesses to take advantage of opportunities or address urgent needs. Additionally, short-term loans typically have more flexible repayment terms than long-term loans, allowing businesses to tailor their payments according to their cash flow. Consistently making on-time payments towards short-term financing can also improve a business's credit score.
Compared to traditional bank loans, short-term financing options require minimal paperwork and documentation, and can be used for various purposes such as inventory purchases, equipment upgrades, or even payroll.
Overall, short-term financing provides an efficient way for businesses to meet their financial objectives while keeping cash flow intact.
Learn more: See how offering net terms significantly grows your customer base and sales.
A few other ways short-term business financing benefits businesses include:
1. A quick and easy application process
Compared to traditional bank loans, applying for short-term business financing is quick and easy. With minimal paperwork and documentation, businesses can quickly access the funds they need to address urgent financial needs.
Additionally, short-term financing typically has a faster approval and funding process than long-term loans. This allows businesses to take advantage of opportunities or manage unexpected expenses without waiting weeks or months for funding approval.
Overall, the simplicity and speed of the application process makes short-term financing an attractive option for businesses that need quick access to capital.
2. Access to funds in a timely manner
For businesses, quick access to funds can mean the difference between success and failure. Short-term business financing provides a timely solution for companies facing unexpected expenses or opportunities.
Unlike traditional lending options that may take weeks or even months to process, short-term loans can be approved and funded within days, enabling businesses to take advantage of opportunities as they arise.
Resolve helps you offer net terms and pays an advance of up to 90% on invoices from approved customers within days to help you access cash quickly.
3. Lower eligibility requirements
For small businesses or those with less established credit histories, meeting the eligibility requirements for traditional loans can be a significant challenge. Fortunately, short-term business financing often has lower eligibility requirements, making it easier for these businesses to access funding.
This can be a game-changer for companies that need capital quickly to seize new opportunities or cover unexpected expenses. Short-term financing options typically have faster approval times and more flexible repayment schedules, allowing businesses to get the cash they need without committing to a long-term loan.
With short-term financing, even smaller businesses with limited cash flow can access the funds they need to grow and thrive.
4. Flexibility in loan amounts and repayment terms
Short-term business financing offers borrowers the flexibility to choose the exact loan amount they need, rather than being limited to larger, fixed amounts. Repayment terms can also be tailored to fit the borrower's needs, with options for shorter or longer repayment periods.
This type of financing is especially beneficial for small businesses that require quick access to cash flow for unexpected expenses or opportunities. The ability to customize loan amounts and repayment schedules allows businesses greater control over their finances and helps them manage cash flow effectively.
Cons of short-term business financing
Short-term business financing comes with several disadvantages that businesses need to consider, too. One of the main drawbacks is higher interest rates compared to long-term financing options. This can lead to a significant increase in the total cost of borrowing.
In addition, short-term financing may come with limited borrowing capacity due to the shorter repayment period, which could make it challenging for businesses to access the funds they need. Furthermore, frequent payments required by short-term financing can strain cash flow management and increase the risk of defaulting if payments are not made on time.
1. High-interest rates and fees
As we just explained, short-term business financing often comes with higher interest rates and fees compared to traditional long-term business loans. While it can provide quick access to cash flow, businesses must carefully consider their ability to repay the loan within the short-term timeframe to avoid paying excessive interest charges.
It's essential for businesses to compare offers from multiple business lenders and read the terms and conditions carefully before committing to a short-term loan. Some businesses may find that other financing options, such as lines of credit or SBA loans, may be more suitable for their needs.
Overall, businesses should weigh the benefits and drawbacks of short-term financing before making a decision.
2. Short-term repayment periods
Businesses that require immediate funds to cover unexpected expenses or manage seasonal cash flow often turn to short-term financing options. However, it's important to consider the repayment periods associated with these loans carefully. Most short-term financing options involve repayment periods of less than 18 months, which can put a strain on cash flow management as businesses must make larger payments in a shorter amount of time.
Consequently, this results in higher interest rates and fees compared to longer-term financing options, making it difficult for some businesses to meet their short repayment deadlines without hurting their credit score or risking default.
Before opting for short-term financing, businesses should carefully evaluate their current financial situation and determine if the repayment period requires weekly payments, monthly payments, quarterly payments, or a longer repayment period.
When to use short-term business financing
As a business owner, unexpected expenses can arise at any time. Whether it's an equipment breakdown or an urgent need to restock inventory, short-term business financing can provide the necessary funds to cover these expenses quickly.
Additionally, seasonal fluctuations in revenue can create cash flow gaps that short-term financing can help bridge. By taking advantage of this type of financing, businesses can avoid missing out on opportunities like limited-time discounts or bulk purchasing deals.
When launching a new product or service, short-term financing can also be beneficial by providing quick access to funds for initial investments. Here are a few ways to use it:
Managing seasonal cash flow
For seasonal businesses, managing cash flow can be a challenge. Revenue fluctuations throughout the year can make it difficult to cover expenses during slower periods. Short-term business financing can provide a solution for these cash flow gaps, allowing businesses to stay afloat during slow periods and take advantage of opportunities that arise.
Whether it's purchasing inventory at a discount or covering unexpected expenses, short-term financing can help businesses manage their seasonal cash flow in a more efficient manner. However, it's important to consider the terms and interest rates of financing options before making any decisions.
Covering unexpected expenses
Unexpected expenses can happen to any business, big or small. From broken equipment to necessary repairs, these expenses can put a dent in your cash flow and disrupt your operations.
Fortunately, short-term business financing can help cover these unexpected costs and keep your business running smoothly. By accessing quick and easy funds, you can avoid disruptions and focus on your daily operations without worrying about the financial burden of unexpected expenses. However, it's crucial to carefully consider the terms of any financing options before making a decision and have a solid repayment plan in place to avoid damaging your credit score.
Funding a new project or expansion
When businesses are looking to fund a new project or expansion, short-term business financing can be an attractive option. This type of financing allows businesses to quickly access capital without committing to long-term debt.
With the added flexibility of short-term financing, businesses can take advantage of new opportunities and grow their operations. However, it's important to carefully evaluate the costs and risks associated with short-term financing before making a decision. Businesses should have a clear plan for how they will use the funds and ensure they have the ability to repay the loan on time.
How to apply for short-term business financing
Applying for short-term business financing can seem like a daunting task, but with the right preparation, it can be a smooth process. Start by determining your financing needs and goals, then research and compare different lenders and their terms. Be sure to also prepare the necessary documents before beginning the application process.
Once you've completed the application, be prepared to negotiate terms with the lender to ensure the best possible deal for your business. With careful planning and execution, short-term financing can provide the capital needed to help your business grow and succeed.
Learn more about Resolve’s simplified financing options through net terms.
Find the right lender for your business
Finding the right lender for your business is crucial when it comes to short-term financing. There are many options available, including traditional banks, online lenders, and alternative financing companies.
It's important to research and compare lenders to find one that meets your specific needs. Consider Resolve, which has been rated by Capterra as having the best ease-of-use software and affordable interest rates, repayment terms, and customer service. Look for a lender that specializes in your industry or has experience working with businesses similar to yours. Oh, and don't forget to read the fine print and understand all fees and charges associated with the loan before signing any agreements.
With these considerations in mind, you can find the right lender for your business and access the short-term financing you need to achieve your goals.
Gather required documents and information
Before applying for short-term business financing, gathering all required documents and information is crucial. Lenders typically require financial statements, tax returns, business plans, and credit reports. You may also need to provide collateral or personal guarantees.
It's important to have all these documents organized and readily available to expedite the application process. Being prepared to answer questions about your business, such as its history, industry, and future plans will streamline the application process even further. By taking the time to gather all necessary information beforehand, you increase your chances of being approved for short-term business financing.
Is short-term business financing the right move for your business?
Short-term business financing can be incredibly beneficial for businesses that need quick access to funds. It can help cover unexpected expenses, manage seasonal cash flow, and fund new projects or expansions. While there are some cons to short-term financing, such as higher interest rates and shorter repayment periods, the benefits often outweigh them.
If you think your business could benefit from short-term financing, start by finding the right lender and gathering all the required documents and information.
To learn more about short-term business financing, specifically net terms and how it can benefit your business, request a demo with our payment specialists.
