When businesses need a short-term cash infusion, the first option to come to mind is often a traditional bank loan with repayment terms ranging several years or more. However, short-term financing, with repayment terms of less than a year—often as little as 90 or 120 days—can be a smart tool to help build your business and fill cash flow gaps without committing to several years of repayment.
Short-term financing has a wide range of applications, says business consultant Dave Lavinsky, co-founder of Growthink in Los Angeles, California. Seasonal businesses may need short-term funds to sustain them during slow periods. Other companies might need to purchase inventory or materials for sales or orders that won’t be paid for months. In some cases, the business investment necessary to sustain growth may leave a business temporarily cash-strapped, says Lavinsky. Short-term financing can also provide the immediate funds necessary for an acquisition or expansion that will lead to additional sales, revenue, or access to capital to meet the repayment terms.
There are several types of short-term financing options. Businesses may use credit cards to finance smaller expenses over a short period of time, says Lavinsky. That can be effective, but it’s important to track the cost of interest on this type of financing, which can be high. Small business credit cards in particular are not subject to the regulations passed in the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which restricted arbitrary interest rate increases and standardized payment dates and also provided other protections. However, some issuers have opted to extend these policies on their small business cards regardless of the requirement, so it’s important to read the fine print. These cards are also often issued based on the business owner’s personal credit, so late payments or high balances could damage the individual’s credit profile.
Traditional bank loans with shorter repayment terms and lines of credit are usually the most attractive option for many businesses seeking short-term financing. They may have slightly higher interest rates than longer-term loans, but cost less in the long run because the interest isn’t being paid over a longer period of time. In addition, they’re much less expensive than options like factoring, where businesses are paid a portion of their accounts receivable and hand over collection activities to the factoring firm at rates that are often “just short of loan sharks,” says Lavinsky. However, they do offer a way to get revenue in-house quickly, he says.
Qualifying for bank loans requires a track record in business of at least a couple of years, as well as demonstrated ability to repay, says Lavinsky. Be prepared to provide financial documents like profit and loss statements for the past two or more years, cash flow analyses, and others, as well as documentation of assets, inventory, cash on hand, or other assets the business owns that might be used as collateral. If you have contracts with or orders from large clients that show an ongoing relationship, that might be useful, as well. Depending on the amount of the loan and your business track record, you might be asked for a personal guarantee, where you pledge your personal assets as collateral to satisfy the loan.
To avoid needless delays in the decision-making process, discuss your loan package with your bank representative to ensure it’s complete before submitting it. And while credit markets have been tighter in recent years, the 2012 Federal Reserve Bank of New York Small Business Borrowers Poll found that 63 percent of loan applicants in 2011 were able to get at least part of the credit they sought, although only 13 percent were approved for the full amount of the loan or line of credit they sought.
“I’ve always been of the mindset that a company that commits itself to raising capital will raise the capital,” Lavinsky says. “Don’t give up.”