Short Term Business Funding
Small businesses use short-term business financing to help cover expenses for a short-period of time. Sometimes a short-term loan is used as a bridge to more permanent financing, while other times short-term business lending is used as permanent financing in a pinch. In this article we will compare the various short-term business funding options, so that borrowers will have a better understanding what each entail.
Quick-jump to the following loans:
- Term Loans
- Line of Credit
- Short Term SBA Loans
- Alternative Short Term Loans
- Factoring
- ACH Cash Advance
- Merchant Cash Advance
- Hard Money Real Estate Loans
- Asset Based Loans
What is a Short-Term Business Loan?
Short-term capital (structured as either term loans, lines of credit, factoring, or sale of future business receivables) that will be borrowed and paid-off in a shorter period of time than would normally take a business to repay. Short-term business loans tend to have rates that may be a bit higher than a business would get with a longer-term business loan, but that is not always the case. Sometimes a lender will offer a better rate for a shorter-term loan because the lender isn’t exposed to an extended repayment period – which could increase the small business owner’s potential for default. Other times, a short-term business lender may offer higher rates for the shorter-term loan because the loan is in itself, a higher-risk type of financing (thus: the reason for the shorter-term).
Are Short-Term Loans Expensive?
Sometimes they are. As mentioned above, the higher the risk, the shorter the terms and higher the rates a lender will charge. But its not just that short-term loans may be expensive, it’s the stress that a short-term loan can put on a company’s receivables and cash-flow. When you get a loan that is paid back quickly with a short term, you are going to have to make larger payments (whether it be monthly, weekly or daily) than you would with a long-term business loan. Increasing stress on cash-flow can lead to the need for additional working capital to help meet your needs, creating a sort of debt-spiral.
What are the Short-Term Business Loan Uses?
- Purchase inventory: short-term loans are used to purchase inventory when a small business and retailer feels that purchasing such inventory will create a return on investment that makes taking-on debt well worth it.
- Make payroll: As you may know, there is no bigger obligation for a small business owner than making sure their employees pay is covered. Sometimes, when cash-flow is short, a small business owner may take a short-term loan to cover labor costs, because the alternative is to be late making payroll — which is unthinkable.
- Bridge obligations: During the course of business, a company may find themselves short on cash to pay vendors, merchants, distributor, etc.. Rather than fail to pay these business partners, an option could be to get a short-term bridge loan to make sure that your obligations.
- Tax obligations: Paying taxes on time is crucial to make sure your company is in good standing with the government. Failure to pay taxes could lead to a lien being placed on your business. Whether your in a payment plan or not, there are options for small businesses seeking short-term financing to cover taxes.
- Purchase supplies: There are times when a business doesn’t have the cash or capital to pay for crucial supplies and needs financing to help make the purchases. Other times a small business will identify purchases at a low price they’d like to lock-in to help increase margins. Either way, there are short-term financing options available.
- Emergency uses: As a small business owner, you know that part of your business day is dedicated to putting out small fires. Sometimes these emergencies have a Dollar cost associated. If in immediate need for short-term emergency business financing, there are a number of options available.
- Marketing and advertising: You can have a great idea, great product or great service, but if you aren’t reaching your target market to let them know about your company, you won’t have many sales. Therefore, making sure you have sufficient capital to supply your marketing budget is important, and there are plenty of short-term capital options available.
- Purchase machinery and/or equipment: At times a business may find itself with old equipment that either breaks or isn’t running efficiently. Other times a business may find that during expansion it needs new equipment to help with demand and create efficiency. When they find themselves in these positions they may seek a short-term loan or equipment lease.
9 Types of Short Term Business Loans
Short term loans are offered by nearly all types of business lenders, including almost all traditional lenders (such as small banks, large banks, credit unions and community lenders). As for non-bank short-term business lending options, they are offered by private lenders, institutional lenders, marketplace lenders, factoring companies and cash advance funders. Below we will look at each lending option, along with the pros and cons associated with each form of capital.
Term Loans
Traditional banks (large banks, small banks, community banks and credit unions) offer short term financing in as both term loans and lines of credit. Traditional bank lending is by far the cheapest financing option for a company, but that’s generally because banks are unwilling to expose themselves to much risk. So in order to qualify for short-term bank financing, you and your company will need excellent credit, good cash flow, and sufficient collateral to cover the lender’s losses should you default.
| Rates | 5-15% |
|---|---|
| Terms | 1-30 years |
| Funding Amounts | $50,000-$50,000,000 |
| Collateral | May be required |
| Fees | Varies |
Line of Credit
Businesses, both small and large, rely on short term lines of credit to help cover costs of operational expenses that occur in day to day business. A line of credit is a preapproved form of financing that allows a business to access short-term capital as they need it, without having to go through further approvals and due diligence to obtain their financing. With a line of credit, the borrower only pays interest on the money that is used – not the overall facility. A bank short-term line of credit is usually secured by the company’s accounts receivable but can also be based solely on cash-flow.
| Rates | 7-12% |
|---|---|
| Terms | 1-2 years |
| Funding Amounts | $100,000-$500,000 |
| Collateral | May be required |
| Fees | Medium costs |
Short Term SBA Loan
The Small Business Administration’s short-term financing options generally fall under the SBA’s main loan program: the SBA 7(a) program, including the SBA Express program and the SBA Microloan program. While many banking lending institutions have access to the SBA-enhanced funding of smaller, short-term financing, there are a few that specialize in the programs. Those that do have an expedited application and due diligence process and can fund within 10 business days. SBA Microloan program offers small businesses access to short-term working capital (up to 6 years) with a streamlined process that allows the SBA to approve most of the small business loans in 36 hours. Rates for SBA Microloans are generally between 8-13%.
| Rates | 5-8% |
|---|---|
| Terms | 3-10 years |
| Funding Amounts | $50,000-$5,000,000 |
| Collateral | Required |
| Fees | Medium costs |
Alternative Short Term Loans
While bank loans and SBA financing are ideal funding options, the chances of meeting the lenders’ requirements to obtain those loans can be difficult. Even if a company does meet the requirement required for a traditional bank or SBA loan, the process may take too long to meet the capital needs of the company. Therefore, a better option may be a short term alternative small business lending. Mid prime alternative loans are loans that aren’t quite bank-rate but are also not extremely expensive as other forms of business operating capital, like cash advances and factoring.
| Rates | 7-25% |
|---|---|
| Terms | 1-5 years |
| Funding Amounts | $50,000-$500,000 |
| Collateral | May not be required |
| Fees | Medium costs |
Factoring
Invoice financing (often referred to as “invoice factoring” or just “factoring”) is a way for companies to obtain short-term capital through the sale of their existing accounts receivables. A company will either sell their invoices or use their unpaid invoices as collateral to obtain fast funding for short-term purposes. With factoring, the company sells the invoice at a discount, and with invoice financing, the company will get forwarded a percentage of the invoice’s value (minus a fee) and are forwarded the remaining when the invoice is paid-in-full.
| Rates | 1-3% |
|---|---|
| Terms | 1-2 years |
| Funding Amounts | $10,000-$5,000,000 |
| Collateral | Required |
| Fees | Medium costs |
Unsecured Loans
If you have a strong credit score (above 700 FICO) and are looking for short-term funding options that won’t cost a lot on the front-end, a good option could be obtaining an unsecured business line of credit. Most commonly provided as a business credit card, an unsecured line of credit can provide up to $500,000 in financing, and the money can be drawn and deposited directly into the small business’s main operating bank account. The beauty of an unsecured business LOC is that there is 0% APR for the first 12 months.
| Rates | 0% APR for 12 months |
|---|---|
| Terms | 1-3 years |
| Funding Amounts | $10,000-$500,000 |
| Collateral | Not required |
| Fees | Medium costs |
Cash Advance (ACH)
ACH cash advance business financing is usually the quickest-funding short term financing option available. But in return for the speed of funding are much higher rates than other forms of commercial financing. Business cash advances aren’t small business loans but are instead the sale of either future credit card deposits and/or bank deposits. The cash advance funder will provide a loan amount along with a set repayment amount, and then deduct daily payments from the company’s bank account deposits each business day until the agreed upon payment is paid off.
| Rates | 1.10 – 1.50 |
|---|---|
| Terms | 3-24 months |
| Funding Amounts | $2,600-$2,000,000 |
| Collateral | Not required |
| Fees | High costs |
Merchant Cash Advance
While a MCA can have terms between 18-24 months, a short-term merchant cash advance is an advance that tends to be less than 12 months in term, and often no more than 6 months. A short-term MCA takes hours to get an approval and can fund within 24 hours of submitting the application. Unlike an ACH loan (which is repaid via Automated Clearing House), an MCA advance is repaid by splitting each day’s merchant processing transactions with a funding company. Rather than taking a set amount from the small business owner’s bank account, this type of financing takes only a percentage – therefore there isn’t a set amount, and the repayment remitted will decrease on days with slower sales.
| Factor rates | 1.10 – 1.50 |
|---|---|
| Terms | 3-18 months |
| Funding Amounts | $5,000-$500,000 |
| Collateral | Not required |
| Fees | Low to High costs |
Hard Money Real Estate Loans
Hard money loans are short-term commercial real estate loans that can be applied for and funded within only a matter of days. The beauty of a hard money loan or stated income loan is the fact that few documents are needed to complete funding. With a SBA commercial real estate loan a borrower can expect to supply lots of business and personal financial information, and the process can take months to complete. With a hard money loan, few documents are needed other than an application, appraisal and current mortgage note.
| Factor rates | 7-15% |
|---|---|
| Terms | 1-3 years |
| Funding Amounts | $100,000-$20,000,000 |
| Collateral | Required |
| Fees | Low to High costs |
Asset Based Loans
One way to obtain short-term business financing for borrowers without the credit or revenues a bank would require is to monetize their balance sheet assets. By collateralizing your balance sheet equity, an asset-based lender can provide shorter-term financing at an affordable rate – which wouldn’t have been available without pledging the collateral.
| Rates | 8-20% |
|---|---|
| Terms | 1-10 Years |
| Funding Amounts | $10,000-$20,000,000 |
| Collateral | Required |
| Fees | Low to High costs |
Summary
As you can see there are numerous short-term business financing options available to companies needing capital. Keep in mind that these are just some of the types of short-term business capital options available, and there are many more. If you would like help understanding all the various short-term capital options and need help securing the best possible loan for your small business, please reach-out to one of our funding specialists, and they’ll help you secure the right loan for your company.
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