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6 Short Term Financing Options for Growing SMBs

No doubt that you’ve seen for yourself that having quick access to capital is vital for keeping your business running smoothly. One way to get funding in a hurry is short term financing. It can help business owners cover unexpected costs or losses, bridge cash flow gaps, or take advantage of timely opportunities while limiting long-term financial obligations. In this blog post we’ll discuss when to use short term financing, which options are suitable for new and growing businesses (our area of expertise here at FundThrough!), the pros and cons of each option, as well as background on how each option works and is used. Read on to learn more about these different financing options so you can make the best choice for your business.

Short term financing definition

Short-term financing is a form of borrowing or lending. The time frame for short-term financing typically ranges from a few weeks up to a few months, depending on the type of financing chosen and the repayment terms. Short term financing is generally used as a means to bridge cash flow issues, cover unexpected costs or losses, or take advantage of timely opportunities. By its very definition, short term financing does not involve long term commitments. This type of financing is beneficial for businesses that don’t want to be locked into one financing solution for an extended period of time.

Advantages and disadvantages of short term finance

The main advantages of short term financing are that it provides businesses with the capital they need to cover expenses when cash flow is tight, or to take advantage of growth opportunities without having to commit long term. It can also provide flexibility for businesses that want more control over how and when they pay back a loan. Short term finance is not without risks, however, and it’s important to be aware of the negatives before agreeing to any funding. These potential downsides include higher interest rates compared to long term financing options (especially if you have bad credit), shorter repayment terms which can be difficult to meet if a business is not in the best financial state, and potential legal fees or penalties in the event of non-payment. It’s important to carefully consider all of these factors when considering which short term financing solution is right for your business.

How are short and long term financing different?

The main difference between short- and long term financing is the duration of repayment. Long term financing typically involves a repayment period that can span up to several years, while short-term financing usually has a much shorter term — typically ranging from weeks to months. Additionally, long-term financing often requires more collateral to secure your funding than short-term financing. As well, the use cases for long-term and short-term financing differ. Long-term financing is typically used for larger business investments such as asset purchases or capital expenditures, while short-term financing is commonly used to cover everyday operating costs, bridge cash flow shortfalls, or take advantage of timely opportunities.

When it makes sense to apply for short term financing

There are a number of situations when it might make sense for a business to opt for short-term financing, including:
  • To cover unexpected costs or losses.
  • To bridge cash flow gaps.
  • To make payroll while waiting on accounts receivable to come in.
  • To take advantage of timely opportunities, such as inventory discounts.
  • To bridge a gap in investment capital from VCs or angel investors.
  • To finance the purchase of assets, such as equipment or real estate.
  • To fund growth opportunities.
  • To meet spikes due to seasonal demand.
  • As an alternative to business credit cards when cash flow is tight.

For these situations and more, we’ll go over a few common types of short term financing that make the most sense for startups, SMBs, or any business that’s looking to grow and requires working capital.

Types of Short Term Financing

While there are many short term financing options available, a lot of them aren’t well suited to businesses that are new, growing, or need to access a quick funding source. There are pros and cons to each type of funding option, and we’ll also look at how each works. And of course, you can always combine different short term financing options to create a customized funding strategy that meets the needs of your specific business. Our Alternative Finance Guide can help you learn about business funding sources outside of the traditional banking system.

Accounts Receivable Factoring

Also known as invoice factoring, accounts receivable factoring is a form of financing where a business owner sells outstanding invoices to a factoring company for fast access to funds. The business owner gets cash for the invoice amount, less any fees, ahead of long B2B payment terms. The business owner’s customer instead pays the invoice amount to the factoring company according to the original payment terms. This gives business owners access to additional funds anytime they need it, without taking on long-term debt.

It’s important to note that accounts receivable factoring is different from invoice financing, where a factoring company still gives a business owner cash for their invoice, but the business owner pays back the invoice amount themselves, plus a fee. Find out how to choose between invoice factoring vs invoice financing.

While many business owners and finance leads have been reluctant to fund invoices in the past because they worry that customers will think their business is struggling, the truth couldn’t be more different. Receivables factoring makes businesses more successful when they need to maintain their cash flow in the face of long invoice payment terms. In addition, it often helps business owners stress less about their cash flow situation! Many successful companies use invoice funding to fuel their growth. On top of that, for many large buyers, paying a factoring company is simply a matter of business as usual.

Pros of accounts receivable factoring:

  • Provides quick funding, often in a matter of days.
  • Flexible funding you can get anytime.
  • Avoid bank hassles. No minimum credit score or annual revenue requirements!
  • No dilution of ownership (read more about non-dilutive funding here).
  • No debt on your balance sheet. You can even fund invoices at strategic times in order to bolster your books to appeal to investors!
  • Puts time back in your day without the need to chase down accounts receivable.
  • A simple application process, unlimited funds, and integrations with Quickbooks and OpenInvoice (exclusive to FundThrough) make getting started a breeze.

Cons of accounts receivable factoring:

  • Factoring company has to contact your customer to redirect payment. A quality invoice factoring company will always treat your customers professionally. Here’s our approach.
  • Perception that factoring transactions are difficult to record in accounting. Don’t stress! We walk you through it step by step. (Even if you don’t use QuickBooks for your accounting software, the same principles in the linked article apply.)

Trade credit

Trade credit is a type of short-term financing that allows a business to receive purchased goods or services while paying on net terms rather than at the time of receipt. For many small businesses, imposing net terms might not be an option, but it might be possible with some of your suppliers. This type of financing is common among businesses, as it helps them improve cash flow and take advantage of early payment discounts.

Pros of trade credit:

  • Eliminates or reduces the need for other common forms of financing.
  • Helps with cash flow and allows businesses to purchase goods when they can’t pay upfront.
  • Improves relationships with your own vendors because you have more flexibility in paying your bills on time.
  • Provides access to discounts for early payment.

Cons of trade credit:

  • Often requires a good credit history, which can be difficult for startups or newer small businesses to obtain.
  • The supplier might not offer favorable net terms, making it difficult to pay on time.
  • Late payments incur penalties and interest charges that aren’t always transparent.
  • If you don’t manage your accounts well, you could quickly run up outstanding balances that are difficult to manage.
  • The supplier might require some form of collateral or a personal guarantee in order to extend credit, which can be risky for the business owner.
  • Another caveat is that not all suppliers will offer trade credit.

Bridge Financing

Bridge financing is a type of loan that often used by startups to bridge the gap between funding rounds. This loan type is ideal for businesses that need to meet short term fixed costs or continue to invest in sales and marketing to increase valuation. Bridge loans can be taken out from a startup’s VC investors, investment bank, or from specialized alternative lenders.

Pros of bridge financing:

  • Quicker access to capital than traditional bank loans.
  • Lower interest rate than longer-term loans means lower loan costs.
  • No dilution of ownership (except for investor conversion rights).
  • Allows businesses to take advantage of opportunities.

Cons of bridge financing:

  • Rigid loan payment terms as a result of fixed payback periods.
  • A shorter period for repayment compared to traditional loan terms, leaving less time to generate revenue or secure further funding.
  • May require collateral for loans or a personal guarantee from investors/owners.
  • Investors can sometimes convert the loan into equity shares in future funding rounds, leading to dilution of ownership.

Government-backed small business loans

Depending on the size of your business, you can get different types of loans from the Small Business Administration (SBA) in the U.S. and the Small Business Financing Program in Canada. In order to qualify for these small business loans, your business will need to meet certain annual revenue requirements, use the funding for qualifying business costs, potentially meet credit score requirements, and submit an application according to the requirements of the program. (That’s a mouthful!) The loans themselves aren’t provided by the programs, but by lenders that are partnered with the programs. The programs simply make it easier for small businesses to get loans from financial institutions by sharing the risk with lenders.

Pros of government-backed small businesses loans:

  • Low fees and low interest rates.
  • Long-term repayment terms, up to 10 years in some cases.
  • No collateral needed for most loans.
  • Generous funding available (up to $5 million).

Cons of government-backed small businesses loans:

  • Lengthy application process that often requires a lot of paperwork.
  • High credit score, strong business financials, and time in business may limit eligibility.
  • May not cover all the necessary funding to start or expand your business.

Credit Cards

Credit cards are a convenient and fast way to pay for business expenses, and they can also provide businesses with financing when there’s a short-term cash flow gap. Business credit cards offer features like rewards programs, longer payment terms, higher spending limits, and more that make them appealing to new and growing businesses. They also make sense for smaller purchases that don’t require a long-term repayment plan and can easily be repaid over a shorter period of time.

Pros of credit cards:

  • Builds business credit history.
  • Easier to qualify for than lines of credit or short-term loans.
  • Many business credit cards offer rewards programs that give you travel credits, cash back, or points when you make purchases.
  • Most business credit cards have extended payment terms, giving you more time to pay off debt.

Cons of credit cards:

  • Many B2B suppliers don’t accept credit cards for payment.
  • Business credit cards have higher interest rates than consumer cards and business lines of credit.
  • Many business credit cards come with annual fees and penalties for late payments or exceeding your credit limit.
  • The ease of making purchases can lead to impulse buys, so you should plan out purchases in advance whenever possible.

Credit Unions

Credit unions are not-for-profit financial institutions owned by their members, that offer competitive rates on short-term loans, checking and savings accounts, and other services. It might make sense to opt for a credit union vs a traditional lender if you only need smaller amounts of funding, are a newer or growing business, and if your business is local rather than national. That’s because they offer more personalized service and are more invested in the success of their members than a traditional business bank.

Pros of credit unions:

  • Credit unions typically offer lower interest rates than traditional lenders.
  • Faster application turnaround time than banks.
  • Offer additional resources for small businesses.
  • Credit unions can provide personalized service and attention since they are customer-owned and operated.

Cons of credit unions:

    • Compared to banks, credit unions typically have fewer locations, services, and products.
    • Even though they have often have more flexible lending requirements when compared to banks, credit unions may still have a stricter approval process for business loans.
    • Some credit unions charge higher fees for non-members. It’s important to weigh the costs of membership against the benefits of short term financing with a credit union.

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