Short-Term Financing: A Brief Guide

by | Jul 11, 2022 | Business Finance | 0 comments

At some point in your business’s lifecycle, you’ll likely need money. Generally speaking, this will take the form of a business loan. It could very well be short-term financing. Which brings us to the question, what exactly is short-term funding? This article looks at some of the basics associated with this particular type of small business loan.

What is Short-term Financing?

Let’s start with something easy… Short-term financing, as the name suggests, is a form of business loan that a borrower will repay within a relatively short period. Usually, the repayment period for this kind of financing will be less than a year. There are some, however that can extend longer than that to 18 months or perhaps even two years.

The good thing about short-term financing is that it can be easier and quicker than other loan types. Do keep in mind, though, that it will often come with higher interest rates. But again, you are paying this off over a shorter expanse of time.

The reasons companies will apply for short-term financing can vary: everything from the need for additional working capital, to an office build-out, to inventory purchases, to launching a new product, and this scratches the surface. The key is that your business is usually in a position where it needs cash quickly, so short-term financing emerges as a viable option for you.

Various Types of Short-term Financing

Of course, there are short-term loans that are incredibly popular. These lump-sum cash payments require repayment within a stipulated amount of time—usually a short amount of time. There are, however, other forms of short-term financing to consider.

A business line of credit: this works like a credit card. You are allotted a total amount, and you draw from that only what you need. The good thing is you only pay interest on what you draw, not on the full amount. Once you repay the money, it is again available for you to use.

Merchant cash advance: essentially, a lender will give you money based on a projection of your future sales. You will then pay the loan back as a percentage of those future credit card sales. When sales are up, you usually pay more than when sales are slower. This could be a perfect solution for some seasonal businesses.

Invoice financing: with invoice financing, a lender buys your unpaid invoices and pays you a certain percentage of the total value upfront. Depending on how the loan is structured, either the lender will try and collect on the invoices or, in some cases, it may be your responsibility to collect.

The Benefits of Short-term Financing

This is a prevalent form of financing amongst small business owners. Among the many advantages of applying for funding short-term, regardless of the specific type, are:

  • It is generally easier to qualify for. Longer-term loans tend to be seen as riskier. Whereas with short-term financing options, the lender may be more willing to take a chance on your business.
  • The process is fast. Especially if you’re working with an alternative or an online lender, the process may only last a couple of days. Usually, a business will get a decision the same day, and then the funds will hit their account within 1 to 2 days.
  • A relatively low-cost option. Because you are paying this off over a shorter period, the interest that accumulates will not be as much as, say, if you were in a long-term loan situation. Thus, overall, a low cost is associated with the capital you are borrowing.

First Union Lending Wants to Work with You

We offer various short-term financing options for our clients across the United States. We have short-term loans, business lines of credit, invoice factoring, and merchant cash advances. Even if your credit score is less than ideal, we might still have a solution for you. It’s about a big picture approach; we are not fixated on one number or score. If you need additional working capital, we want to consult with you. Call today.