Short-term financing: Ultimate guide for business owners

June 2022

What is the real difference between short-term finance, vs. long-term finance? As a small business owner, you have likely come across these terms as well as other financing products that can probably help you grow and develop your business.

Exploring these funding opportunities can really benefit your business with time, which is why we have created the ultimate guide about short-term finance. We will explain what this type of financing is, its characteristics, advantages, disadvantages, and examples, so you can truly consider if this is the right choice for you.

Let’s begin!

What is short-term finance?

Let’s begin by defining it. Short-term financing is the type of financing where your business uses short-term sources, meaning the length of the payback period lasts less than one year. This helps your company grow the working cash that you can use for operating expenses with a smaller form of financing. People often refer to it as working capital financing because it is used for inventory, receivables, etc.

Characteristics of short-term financing

  • You can use them when you are not eligible for credit lines or traditional business loans from banks: These are very valuable options for small business owners because you can acquire smaller amounts – between $5,000 all the way to $500,000, in some instances even more. Since you might not be eligible for a bank loan yet, short-term financing options can let you acquire fast working capital, when you are in need of cash flow to reinvest in the business. For more information about the types of short-term financing?

  • You can pay them off quickly: As their name suggests, you can pay these off quickly. In most scenarios, you need to pay between 6 and 18 months.

  • You pay at your own pace of your business: Most financing options of these sorts don’t have a specific payment schedule or due dates per se; the repayments are a percentage of either your invoices, your credit card transactions, or bank balances. This means that you can essentially pay back the financing at your own pace

An example of short-term financing

Let’s say you own a small coffee shop. You need to take a loan to grow your operations during high season since there are a lot more people walking around thanks to the great weather. After making numbers, you land at $10,000 for 6 months, so you can get a new espresso machine and hire two more baristas. Because this loan is for 6 months, it will be treated as short-term financing. During or after those 6 months, you will need to repay the amount and the interest. Is likely that you will be in a stronger financial position and will be able to easily repay this small loan.

Advantages of short-term finance

  • Fast Capital: As we mentioned, one of the biggest benefits is the fact that you can get these funds fast when you need them most. This can be especially useful during those emergencies when you need working capital fast, or during the low months or seasons of your business. Sometimes, you can have the funds in your account in less than a day!

  • Easier Processes: How can you get the fund these fast? Well, because the process of applying and getting them is simpler. This is the case because short-term loans are less risky, and so the documents required are fewer, making it very approachable for anyone. Additionally, since these are not traditional loans, like MCA's, the cost of the capital can potentially be considered tax-deductible, unlike traditional business loans.

  • Ability to Renew: Once you start a relationship with a short-term funder, and you show that you are a growing business, pay on time, and other characteristics that are attractive to them, you can essentially look at that funder as your personal capital arm in your company. Because now you've gained their trust, and the process to get funded again becomes easier and faster, and if the business is growing, you will probably get higher amounts for better terms.

Disadvantages of short-term finance

  • You May Affect Your Credit Score: One of the downsides of short-term financing is the fact that, if you can’t pay back the loan within the year period, it can affect your credit score adversely. This can lead to you needing more loans to pay off others, leaving you in an endless cycle of borrowing. For this reason, you need to read your market carefully and project numbers thoroughly before getting any type of finance, so you can make sure you can pay off what you owe while growing your business.

  • Can Be More Expensive: Short-term finance solutions can become costly because you will have to pay higher rates since you have less time to pay. For this reason, it can be more difficult to pay what you have borrowed on time.

  • More Frequent Payment Instalments: In hand with the payments being established for a year only, this means they are also more frequent - sometimes weekly or daily. With shorter payment terms, you’ll have to pay in larger chunks, and in more instalments than you would with longer-term options.

Are short-term finance options for you?

Now that we have a better understanding of what short-term finance options are like, you might be wondering if it’s the right choice for you and your business. Ultimately, there are many benefits to either long-term finance or short-term finance, and it really depends on your specific needs.

Considering what we covered, short-term financing is more accessible and easier to qualify for, and there are a variety of types for you to choose from. They are very helpful for problems of sudden cash flow, emergency funds, and low seasons - especially for small businesses who are just starting out and are in need of cash but are considered riskier borrowers. Nonetheless, it is always important to be aware of the consequences of nonpayment and how it can affect your company and its credit score.

If you find that you are in need of working capital quickly and that short-term finance is the right option for you, we can help! As long as you have at least 3 months in business, and at least $7,500 in monthly revenue we can help you find the working capital you need fast and you can be funded in as little as 3 business days.