Short term financing: 5 different options for your business

Every small business owner reaches a moment where they need to find funding. Whether it’s to cover an expense or grow the company, how you raise funding depends on a number of factors and your business needs.

You will need to consider the type of business you’re managing, your goals and the situation your business finds itself in.

Applying for business funding can be a stressful and time-consuming experience, which is why it pays to be aware of your options beforehand and make a plan.

When to get short term financing

The first task that comes with finding short term sources of finances is to first identify why your SME needs short term business financing.

Many providers and business banks will want to know the reason you’re getting financing. You’re also more likely to use the money appropriately if you have a plan in place.

Here are a few possible reasons:

• To cover a large expense (e.g. new equipment)
• To grow the business (e.g. hire staff)
• To help with cash flow fluctuations (e.g. if your sales are seasonal)
• To pay off a debt or monthly payments
• To help get through a difficult period

What is the difference between short and long term finance?

In general, short term financing is usually for working capital purposes and required for just a short period.

Broadly speaking, short term loans are more expensive and will require weekly or daily payments. If you’re looking for extended support or uniquely large expenses, long term loans might be more appropriate.

What are the advantages of short term financing?

Immediate access

Businesses that require short term finance can typically access funds in days, or even just hours. Accessing longer term financing often takes weeks and businesses may not even get the funding they need at the end of it.

Availability

Short term loans are readily available to all types of companies. Even businesses with poor credit can access short term finance. Lenders are more lenient than conventional lenders and will look at other factors such as business assets.

Less paperwork

As the barriers to getting a short term loan are a lot lower, there is less documentation to complete. Time-strapped businesses owners can easily acquire finance and focus on more pressing business matters.

What are the disadvantages of short term financing?

Higher interest rates

The easy access to short term finance is reflected in the higher interest rates. Businesses must have a plan in place to repay these loans to ensure these financing costs don't spiral out of control.

Increased risk

If you are taking out a short term loan to cover your monthly expenses, it is easy to fall into a trap, and take out a loan every month. This is a dangerous cycle and you should understand why you have a shortfall before falling into a pattern.

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Types of short term financing:

1. Small business loan

Your average short term business loan is typically used for working capital such as staff salaries, goods and services and daily operations.

These types of loans can range from a month to a year and can be processed by a bank or specialist lender. Your business will likely receive a lump sum at the beginning, and you’ll need to pay off the debit with interest on regularly scheduled payments.

If you’re applying through a bank, your business plan will be studied carefully and it may take longer to access funding. If your company is relatively new, you may be better off going to a specialist lender.

Small business loans are a little more expensive with higher interest rates of around 10%. However they are a good option if you need quick and easy access to working capital. As a founder, you will need to possess a high personal credit score in order to apply for the loan amount.

2. Equipment finance

Equipment financing is a type of short term loan that works great for capital or equipment heavy businesses. With this secured loan, you essentially use your current equipment or items you want to purchase as collateral.

This makes the loan a lot more secure for the lender and therefore a lot cheaper and easier for you. There are several types of equipment financing such as renting before purchasing, paying in full over a specific period of time or renting for a monthly premium.

If you need new machinery or other large equipment, this type of short term financing is a good way of obtaining a bank loan, even if you have a poor credit history.

3. Line of credit

With a line of credit, your business has direct access to credit whenever it needs. Like a credit card, you only pay interest on the amount you borrow.

The line of credit will require some sort of personal guarantee (such as a house or car), but it’s a lot more flexible than other types of financing. It usually has a lower APR than credit cards and can last up to a year.

A line of credit is a good type of financing for businesses that are more seasonal and have unpredictable cash flow. It is more of a long term solution so businesses have access to funds whenever they need to.

You can apply to lines of credit through alternative lenders such as Drafty and Polar Credit.

4. Equity finance

Equity financing is another financing option for startups that are looking to grow. Equity financing is essentially exchanging ownership of your company for money. You offer shares to angel investors, VCs and outside investment, in exchange for capital.

Although the funds are processed quickly and there are opportunities to raise a large amount of money, you will need to sacrifice some control over your company. This type of financing is usually best for companies that are looking to expand and grow their customer base.

‍5. Invoice finance

Invoice financing is a good option for B2B businesses that deal with clients and send invoices. If late payments cause serious cash flow issues and your business requires more predictable and steady revenue, invoice financing allows you to use your invoices as collateral and get a merchant cash advance.

With this financing option, you send the invoice and a specialised lender pays 50%-90% of the total invoice upfront. You then reimburse the lender, along with a fee, once your client pays the invoice.

This type of funding is ideal for business owners with a low credit score who need funds quickly. The main issue is that these lenders can charge costly fees, and it can be an expensive short term financing option in the long term.

Read more: What Are the Invoice Requirements in the UK?

Why use short term financing?

Short term financing is a good way to gain access to funds relatively quickly without committing to anything long term commitment. That’s why they are good for emergencies or for a cash injection.

Many of these funding options won’t require an extremely high credit score, as other kinds of finance do, which is why they can be a lifesaver for small businesses.

If you know that short term financing will provide you with guaranteed revenue, acquiring it is a no brainer. You'll be able to pay off the loan as soon as you get more capital.

If you need a short term loan to cover your expenses, it is important that you don't fall into a trap of taking out a short term obligation to settle a long term obligation.

However, if you are experiencing a difficult period or a seasonal downturn, a short term loan can be a good way to help get through a difficult period and encourage growth.

Whatever option you use, it's essential that you examine all forms of financing, application processes and repayment terms.

If your issues are related to the coronavirus pandemic, the UK government has also issued support with longer term loans. Visit CBILS scheme to check your eligibility.

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By accepting payments with QR codes, your customers can pay from the comfort of their home, at a safe distance and in a much more secure way.

As a business, you receive your funds the same day and can also start accepting click and collect through our free online shop. Interested in trying us out? Get in touch with our sales team today.