What Short-Term Financing Options Are Available for Businesses?
Short-term financing gives you quick access to capital so you can meet upcoming business expenses and fill in gaps in your cash flow. Unlike long-term loans whose repayment periods may stretch over many years, you typically pay back short-term funding within 12 to 18 months. This makes it a flexible financing option that doesn’t tie you down for years.
In this article, you’ll learn about the situations where short-term financing can help a business and discover eight popular options you can use to meet your funding needs.
Why Businesses Take Out Short-Term Loans
Short-term funding is suitable for companies seeking capital in a variety of circumstances, including:
Coping with seasonality: Firms use short-term financing to manage expenses while revenues are down in quieter seasons. They can also use it to buy extra inventory to prepare for peak seasons without causing liquidity constraints.
Meeting unexpected costs: Sometimes, businesses need to find the money to pay unexpected bills, like legal fees or equipment repair charges. Short-term financing allows companies to meet their obligations and keep things running smoothly.
Acting on opportunities: Short-term loans allow firms to take advantage of new opportunities, like making a down payment to purchase a competitor or taking advantage of a limited-time bulk inventory discount from a supplier.
Bridging cash flow gaps: Sometimes there is a delay between when services are provided and when customers settle their invoices. Short-term loans can serve as a funding bridge, so you stay on top of bills, payroll, and day-to-day operations until those invoices are paid.
8 Short-Term Financing Options for Businesses
Here are eight types of short-term financing you can consider for your business.
1. B2B Buy Now, Pay Later
Buy now, pay later (BNPL) started out as a popular financing option for consumers, but it’s now available in the B2B space as well.
A B2B BNPL solution, like BackdPay, benefits both the customer/purchaser and the supplier/service provider. With BNPL, business customers are able to get the inventory, supplies, or services they need while spreading the cost over several installments—like up to 12 months with BackdPay—helping them avoid strains on their cash flow.
However, the supplier/service provider still receives the full purchase amount right away. So by offering a BNPL payment solution, they are able to help extend their customers’ purchasing power without having to hinder their own cash flow.
2. Business Line of Credit
A business line of credit works much like a business credit card.
Like a credit card, you get a credit limit. That’s the maximum amount you can spend. Your balance is how much you’ve actually spent plus interest (minus any repayments you’ve made so far).
You only pay interest on the balance, and any money you do repay becomes available to borrow again. You’ll be given a time period over which you can use your business line of credit, and your balance must reach zero by the end date.
Backd’s business line of credit offers up to $750,000 in finance with weekly repayments. You can choose a maximum term of either six or 12 months.
The application process for this type of financing takes a few minutes, and Backd can turn around lending decisions within 24 hours.
3. Working Capital Advance
A working capital advance gives you quick access to cash for everyday business costs like rent, payroll, utilities, and other business needs.
They provide small business owners with the extra liquidity they need to cope with revenue fluctuations during slower seasons or when they need to pay an unexpected bill.
For Backd’s working capital advance, you have up to 12 months to fully repay the financing. Choose from daily, weekly, or semi-monthly payments and access funding of up to $2 million.
Backd also offers a 24-hour turnaround on applications for this type of short-term financing.
4. Merchant Cash Advance
With a merchant cash advance, you borrow against your future credit or debit card sales.
If a lender approves your application, they will transfer a lump sum to your bank account based on your anticipated card-based sales. They then collect repayments on a daily basis by deducting a percentage of what you receive from your card payment processor.
This type of short-term financing is very expensive. Instead of setting an interest rate, lenders set a factor rate. So, if you borrow $100,000 and the factor rate is 1.5, you’ll repay $150,000 for your facility in total.
The other complication is the short period of time you have to repay the loan, which can be as little as a few weeks or months. Merchant cash advances can cause future cash flow problems because of these large regular payments, especially if a business operates on slim profit margins or experiences large swings in revenue generation.
5. Invoice Financing
Invoice financing, sometimes called invoice factoring or receivables financing, lets you borrow money against unpaid invoices you’ve issued.
For example, if you offer 30- or 60-day payment terms to your customers, you can sell that invoice to a factorer and get paid up to 90% of its value before the customer pays. You then receive the remainder (minus the factoring fee) when your customer settles their bill.
It doesn’t matter as much if you have a bad credit rating with this type of loan. That’s because financial institutions run credit checks on your customers to determine what their maximum credit limit is.
If your customer does not pay their invoice, you’ll have to pay back any advance your factorer has made to you. If you want to protect yourself against that, shop around for non-recourse invoice financing.
6. Trade Credit
Trade credit is a type of business financing where your suppliers give you time to pay. Many companies that run trade credit programs for their clients do so through factoring firms.
Trade credit works well for both suppliers and customers. Suppliers benefit from increased orders from customers who don’t have the capital immediately available. Customers benefit because they can place larger orders even if they’re experiencing a cash flow gap.
7. Bank Loan
Traditional bank loans are a form of long-term financing that firms repay over many years. However, some banks and online lenders now offer short-term financing to help their clients plug any cash flow gaps.
Loan amounts on short-term bank loans tend to be lower. That’s because banks want to be sure that you can afford the repayments.
You may be able to access lower interest rates by applying for a secured bank loan. Secured loans require you to provide the bank with assets like real estate, business equipment, or vehicles. If you don’t keep up with your payments, the bank may take ownership of the assets you’ve pledged and sell them off to recover any outstanding balance you owe.
Unsecured loans don’t require you to pledge any assets; however, you’ll almost certainly pay more in interest.
8. Payday Loan
Payday loans are very short-term loans made to business owners rather than the businesses themselves. They can be used to tide you over until you receive the capital you’re expecting from customers paying their invoices.
Payday loan providers generally have less strict eligibility requirements, meaning your application is more likely to be accepted than with other types of funding. The downside is that you’ll pay much higher interest rates than most types of short-term financing. Repayment periods can be as little as a few weeks — a few months at the most.
Consider this option only if you need a small amount of cash, you can repay it quickly, and there are no other options available to you.
Get Short-Term Financing From Backd
Short-term financing can be a flexible solution for managing cash flow, covering unexpected costs, and taking advantage of new opportunities. For many businesses, it can make a lot more sense than taking out a long-term loan.
Each option has its own advantages and disadvantages, so when making your final choice, select the option that provides the financing you need and has repayments you can afford.
Backd is an online lender that offers multiple types of short-term financing:
Working capital advance: Access between $25,000 and $2 million.
Business line of credit: Borrow between $50,000 and $750,000.
BackdPay: Has instant approvals for amounts up to $50,000, net 30 terms at 0%, and pay-over-time options of up to 12 months.
Apply now for a working capital advance or a business line of credit, or contact us to become a BackdPay B2B BNPL partner.
