Businesses need cash, whether it’s to finance their long-term growth or just keep the lights on till next week. The trick is to find the best way to finance each situation.
A small business may be perfectly healthy and still end up short of cash. Sometimes you simply need some cash to last another day - like when a crucial piece of equipment needs replacing. Sometimes the client didn’t pay yet, but payroll and taxes still have to be paid. And sometimes you just missed a terrific investment opportunity.
Each type of business finance has its own distinct advantages. From short-term small-dollar loans to large long-term commitments, every option comes with a list of pros and cons.
Before you decide, compare interest rates, repayment terms, credit score requirements and how quickly you’ll get the money. You might want to talk to a financial advisor about how different ways to get money will affect you.
Most Common Forms
Short term financing comes in many shapes, sizes and flavors. Here’s a run down of the most common forms of small business short term financing.
Business credit cards are easy to get, simpler to manage than a loan, and they’re perfect for the unexpected or unplanned expense. The interest rate may be higher than some types of short term loans.
A business card used responsibly can help to build up your business credit rating. Using it unwisely (e.g., maxing it out or paying the bill late) can hurt that rating.
A business line of credit lets you draw money from it as you need it, up to a set amount. Monthly payments vary depending on your outstanding balance. Read the fine print carefully - lender terms can vary.
A business line of credit usually has a higher limit than a business card, so you may be tempted to use it for more than you need or can afford to pay back. Fees can add up.
A short-term bank loan has a fixed interest rate and a relatively short time frame, usually 90 to 120 days. It’s normally secured by some sort of collateral, which may be inventory or sometimes your home. You get a lump sum up front and the payments are fixed.
Some banks do make loans specifically for specific purposes. For example, if you need money to buy a piece of equipment in order to expand or remain competitive, the bank may make a specific equipment loan just for that purpose.
Your community based lender may offer short-term SBA micro-loans and SBA Express Loans. Funds may be available for working capital, machinery, equipment, furniture, fixtures, inventory, supplies.
In an asset-based loan, either the inventory or the receivables act as collateral. The money you collect pays down the loan, bit by bit. In factoring, the borrower sells the receivables at a discount to a factor who collects on them.
Another way to get money to operate is called trade credit. In the best of scenarios, you get the goods or services you need from a supplier without paying anything in advance. Trade credit works best if it is a long-established supplier who knows you and trusts you. Some suppliers have penalties if you miss your payment dates. Defaulting can harm your reputation and your business relationships.
Be Careful with Payday Loans and Bridge Loans
When you need cash, you may be inclined to do anything to get your hands on some. Be careful with payday loans and bridge loans; companies try and push them. Some online lenders try to make money by charging unconscionable interest rates. Avoid pay day and bridge loans unless you have no other option. Getting this particular fast money may set you way back.
A Bank or Lender You Already Do Business With
When you need fast money, the first place you should consider could be a bank or lender you already do business with. In most situations, that is probably the best place to begin.
Another option is to consider cash management services.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
