Short term loans are the types of loans that are payable within a year. Long-term loans are often used to finance major projects like purchasing a company vehicle or expand operations. Short-term loans on the other hand are granted to cover gaps in cash flows and to provide funds for emergencies. The interest rates of short-term loans are often higher than those of long-term loans.
Short Term Business Loans
Many businesses take short-term loans for various reasons. Banks issue such loans to help businesses finance startup costs, fund new projects, pay for emergencies, and cover short-term cash flow gaps. In some cases, vendors may provide short-term loans to certain businesses, especially if the businesses need to buy supplies on credit. These are called short-term notes payable.
Sources of Short-Term Business Financing
Some banks provide overdrafts to businesses that require funds urgently for certain business operations. Overdrafts are arrangements between banks and account holders allowing them to withdraw more funds than they have in their accounts. Overdrafts are short-term sources of financing with repayment periods of about 30 days or so.
U.S. Small Business Administration
The U.S. Small Business Administration regulates business financing programs. The type of short term financing you choose is determined by your business needs and financial situation. However, the SBA often helps businesses in certain states get access to short term financing from various financial institutions.
Line of Credit
A line of credit refers to a financial resource provided by banks and other financial institutions. Business owners can access this resource through their business or personal bank accounts. Just like a credit card, a line of credit is linked to your bank account. This means that all withdrawals made through the credit line should be repaid in cash or by direct transfer to the loanee’s main bank account according to the terms of the bank. Although business owners are often advised to establish a line of credit before they need the financial resource, even last minute applications and approval take a relatively shorter time than a typical loan request. In addition, your bank may make your line of credit remain open for future funding needs provided you are in good standing with them.
Payroll lenders offer short term business loans of up to $100,000. In order to qualify for the loan, your business should have a proven track record with a certain level of established sales revenue. The funds can be used for various business operations. However, it is important to choose the right type of payroll financing with the best terms for your business.
Supplier Grace Period
You could request suppliers to allow you some time to pay for goods that have been delivered. For example, if you are required to pay for goods 30 days after delivery, you could talk to your suppliers and request for a 30-day extension of the payment period. This will give you adequate time to sell the goods and pay the suppliers.
Find a bank that will offer a short-term loan to finance your business operations. The repayment terms and interest rates vary among various financial institutions. Many banks will base loan repayment terms on company’s financial history. It is important to ensure that the terms of your short term business loan are favorable.
The Advantages of Short Term Sources of Finance
The main advantage of short-term loans is that they enable businesses to have funds to cover operating costs. Operating capital refers to funds available for daily business operations. Short term loans can help keep your business running when the business revenue stream is temporarily insufficient to cover operating costs.
It may not be possible to plan for each emergency. Therefore, it is advisable for businesses to maintain a reserve cash fund for emergencies. However, some companies may lack adequate funds for emergencies. Short-term loans can help businesses deal with emergencies.
Many businesses aim to expand their operations with time. However, business expansion may require substantial financial resources. Short-term loans can help business owners to expand their company operations. Unlike long-term loans, short-term loans are usually payable within a year and come with higher interest rates. This type of loan enables businesses to obtain funds for various business operations.