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What is short-term financing?
Short-term business financing, in the simplest sense, is any financing option that has a repayment term of one year or less, though many of today’s lenders will extend terms up to 18 months. Unlike long-term financing, which may be preferred when making major, costly upgrades or purchasing real estate, short-term financing is often used to manage immediate cash flow needs, including things like payroll, seasonal staffing costs, inventory and supply POs, or equipment repairs.
The primary way short-term financing and long-term financing differ is the repayment periods. Here are a few more things to keep in mind when choosing between long and short-term loans.
Short-term financing vs long-term financing
| Short-term | Long-term | |
|---|---|---|
| Use | Cash flow issues, seasonal preparations, emergencies (e.g., broken equipment, immediate hiring needs, etc.) | Large equipment and machinery purchases, real estate and property, etc. |
| Rates & affordability | Typically higher than long-term loans; however, in some cases, shorter repayment periods will result in less interest paid over the repayment period. | Typically lower interest rates than short-term financing options; however, longer repayment periods can lead to more interest paid over the course of the financing term. |
| Payments | Generally daily, weekly, or monthly depending on type. | Typically made on a monthly basis. |
| Eligibility | Short-term financing is typically considered to have less stringent requirements, though eligibility varies from lender to lender.
The application process is typically fast and can often be completed online within minutes. |
Because long-term funding can leave lenders vulnerable to default or lack of payment for upwards of 10 and 20 years, they will typically have use a lengthier application process, requires more documentation and has stricter eligibility requirements. |
| Time to funding | Varies from lender to lender, but funds are often available quickly, with some lenders funding requests the same day or in as little as 1 to 3 business days. | Varies from lender to lender, tbut can take weeks or months. |
Whether it’s maintaining operations or expanding into the next phase of business, funding is often a necessary piece of any effective strategy. But all funding isn’t created equally, and choosing the right type of financing is vital to both long and short-term success.
When it comes to gaps in cash flow, seasonal prep, and unexpected expenses, the right funding solution is frequently one that offers quick access to capital. And though intermediate and long-term financing may solve the problem, it’s frequently short-term financing that fits the bill.
Types of short term financing
If you need a short-term capital boost, there are a number of options available to you. Here are a few short-term financing examples that you may want to consider.
Term loans
When you think of funding options, the term loan is likely one of the first things that come to mind. In both the personal and business lending sphere, terms loans offer a borrower a lump sum of money with the promise of repayment, typically through monthly payments, for a specific period of time.
A term loan can have a short, intermediate (1 to 3 years), or long (3 years or more) repayment periods. These loans can have fixed or variable rates, and eligibility, as well as rates, are commonly based on the applicant’s credit score (personal and business, if applicable) as well as other business metrics, like annual revenue and years in business.
Term loans are offered by many financial institutions, including traditional banks and credit unions as well as various online lenders. And, much like other financing options, there are different types of term loans, some of which may be better suited for a particular project or purpose.
For instance, bridge loans are short-term loans that can help fund gaps between more permanent financing, like between leasing and a new commercial mortgage. Other term loans, like some offered by the U.S. Small Business Administration (SBA), may be best suited for things like inventory, equipment purchases, or operational and start-up costs.
Regardless of what type of term loan may need, you’ll likely find both unsecured and secured loans. If selecting a secured term loan, you’ll be required to use an asset, like a vehicle, equipment, or real estate, as collateral.
Trade/Vendor credit
If your business, like many, relies on a vendor or supplier to provide inventory or operational supplies, then you may be able to use trade or vendor credit as a means of short-term business financing.
This type of financing allows you to purchase goods or services with a promise of payment at a later date, typically in 30, 45, 60, or 90 days. When leveraged correctly, trade credit can make it easier to manage other operational expenses. It can also provide a buffer between when you purchase inventory and when you sell relevant and capture the revenue for relevant goods or services.
For some business owners, trade credits represent a no-hassle way to finance inventory or supplies. Though some vendors will perform a credit check before entering into a trade credit agreement, the process is far less formal than other short-term financing options — the PO and invoice often representing the only required paperwork.
In most cases, vendor credit arrangements don’t carry interest rates in the same way that loans, lines of credit, or credit cards do. However, it’s important to keep in mind that there are risks associated with this type of short-term business financing solution, particularly if you fail to meet your payment obligations.
If that’s the case, you may incur interest as a penalty or be on the hook for late payment fees. Always thoroughly understand the credit agreement and, though it may go without saying, do your best to maintain a healthy relationship with your vendor.
Invoice Factoring
If you invoice your customers and allow them to pay at a later day (e.g., net 30, net 60, net 90, etc.) and you need a short-term financial solution to bridge the gap between payments, then you may want to consider invoice factoring.
Invoice factoring, along with its closely related cousins invoice financing and accounts receivable financing, allows you to leverage those outstanding invoices. In this type of agreement, the financier or factoring company will give you a cash advance for a portion of your unpaid invoices, typically 75% or more. Once your customer pays the invoice, you’ll receive the remaining balance minus any interest or fees.
If you’re considering invoice factoring, there are a few things to keep in mind before selecting a factoring company.
For instance, in traditional invoice factoring agreements, the factor is responsible for collecting unpaid invoices from your customers. This means there will be a third-party involved in your customer billing interactions. — though that’s not always the case. Invoice financing, on the other hand, often allows you to maintain ownership of collection activities.
Today, you may seem terms like “invoice factoring,” “invoice financing”, and “accounts receivable financing” used interchangeably, even though there are distinct differences. As such, it’s important to understand who will be responsible for collections as well as what happens if customers fail to pay.
Another thing to consider is interest and fees, as invoice factoring is often considered to be more expensive than short-term financing solutions like term loans and trade credits.
Despite the potential risks, invoice financing is still a popular funding method that can result in ongoing access to working capital without worrying about cash flow gaps between customer payments.
Merchant Cash Advance
If you need a quick cash infusion and aren’t eligible for other short-term business financing options, then a merchant cash advance can potentially fit the bill. This type of short-term business funding leverages your debit and credit card payments, also known as your ACH payments, in exchange for a fast cash advance — often the same day.
In exchange for this cash advance, the lender will take a percentage of your daily ACH transactions as payment. Though agreements vary from lender to lender, payments are usually automatically withdrawn on a daily or weekly basis until you’ve repaid the debt in full.
In theory, this type of short-term borrowing may sound great; however, it can carry significant risk. Not only does it carry much higher fees and rates when compared to other short-term financing solutions, but because it pulls from your daily electronic transaction, it can further disrupt your cash flow. You should enter into any merchant cash advance relationship with caution as it can easily lead to an ongoing cycle of debt.
Who can benefit from a merchant cash advance? If you have bad credit and you need to boost cash flow immediately, then you may want to consider this option. If, however, you can wait a few days for the funds and have average or above-average credit, you may want to shop around and check out all your short-term credit options first.
Short-term financing sources/companies
Because short-term financing comes in many forms, finding the best lender or financial institution will come down to your unique funding needs, credit history, and current finances. However, we’ve selected a few of the most popular online lenders, many of which offer multiple types of short-term business financing.
OnDeck
OnDeck extends short-term loans from $5,000 to $500,000 to eligible customers. Repayment terms range from 3 to 36 months, and rates can be as low as 9.99% for prime borrowers, though the annual interest rate (AIR) is between 24.6% or 42.5%. The company also offers business lines of credit up to $100,000 with rates as low as 13.99% APR.
You can apply for OnDeck funding online, and if approved, funds can be deposited into your business bank account in as little as 24 hours. Once you accept the loan, you can expect daily or weekly payments for the duration of the repayment term.
To be eligible for an OnDeck loan, you must be in business for at least one year, have a minimum annual revenue of at least $100,000 and have a FICO score of 500+.
FundBox
Fundbox offers short-term financing, including invoice financing and lines of credit for up to $100,000 with terms of 12 or 24 weeks.
As with most online lending applications, the process is fast and you can get a decision in minutes. If approved for funds, you can expect them in your business account in as little as one business day. Fees can be as low as 4.66% for 12-week repayment agreements and 8.99% for 24-week repayment agreements.
To be eligible for funding through Fundbox, you’ll need at least two months of activity in supported accounting software or be able to provide three months of activity in a business checking account. Most applicants will need at least $50,000 in annual revenue, though most approved applicants earn over $250,000 annually and have been in business for one year or more.
Line of Credit by Fundbox
Bluevine
Bluevine offers business loans, lines of credit, and invoice financing. Loans and lines of credit are available for up to $250,000 with rates as low as 4.8% and terms of 6 or 12 months. Factoring lines are available for up to $5 million, with rates as low as .25% per week and terms up to 13 weeks.
Regardless of which lending product you choose, you can expect a quick, online application process that takes ten minutes or less, and funds can be available in as little as 24 hours.
For a term loan or line of credit, you’ll need to be in business for at least 6 months, have annual revenue of $100,000 or more, and have a FICO score of at least 600. If you choose to take advantage of invoice financing, you’ll need to be in business for at least three months, have annual revenue of $100,000 or more, and have a FICO score of 530 or higher.
Funding Circle
Funding Circle is a peer-to-peer lending marketing place that offers secured short and intermediate-term loans for $25,000 to $500,000 with terms from 6 months to 5 years. Rates range from 4.99% to 22.99%
You can quickly apply for a Funding Circle loan online, and once completed, a representative will contact you within an hour. At that time, they’ll review your application and request any additional documentation that may be necessary. Approval can take place in as little as 24 hours, and loans typically fund within five days.
To be eligible for funding, you must be able to provide business tax returns for the last two years, your personal tax return for the last year, and six months of business banking statements. You’ll also need a FICO score of 620 or higher.
The Business Backer
The Business Backer provides small business cash advances up to $200,000, with factoring rates starting at 1.12% and daily, weekly, or semi-monthly payment options. They also offer small business loans for up to $200,000 with terms from 4 to 18 months and lines of credit for up to $100,000 with terms of 12, 18, or 24 months. For term loan or line of credit rates, interested applicants must contact The Business Backer directly.
To apply for funding through the Business Backer, you can complete an online application or contact an adviser directly. Once completed, you’ll gain access to rates and together with your business advisor, you can select the best option available. After approval, funds are typically available within 1 to 3 business days.
Eligibility requirements vary based on funding, but generally, approved applicants have been in business for at least 12 months have annual revenue of $180,000 or more and have a personal credit score of 550 or higher.
Short-term financing strategies
When considering short-term financing, there are a lot of factors you’ll need to consider. And while the funding purpose, as well as the rates and terms, are all important things to keep in mind, you should also be cognizant of the most effective short-term financing strategy for your goals.
Traditionally, financial strategies fall into one of three categories: conservative, moderate (also known as hedging), and aggressive. Conservative offers the lowest level of risk, often with the lowest profitability. Aggressive, on the other hand, has the greatest risk but also carries the potential for the highest profitability — or loss, in some cases. Moderate, of course, falls in between those two.
Short-term funding is generally thought to have more risk, at least for the borrower — interest rates can be high; repayment windows are short; and payments, which can be daily, weekly, or monthly, are also higher than those associated with long-term financing. Further, short-term financing also tends to be a solution to immediate or pressing needs, like gaps in cash flow, necessary equipment repairs or replacements, and other instances that may leave business owners vulnerable in the absence of working capital.
That said, there are situations where short-term financing can be a great boon to your business and represent an option that fits into a more conservative or moderate financial strategy. For instance, a short-term loan can make it possible to take advantage of limited-time opportunities, like inventory or supplies deals or get ready for historically strong seasons, be it marketing, staffing, or stocking expenses. Similarly, leveraging invoice factoring can help you avoid operational deficits while you wait for invoice payments.
In these cases, if you have reasonable expectations for a strong ROI, then short-term funding can carry a lower risk. This is only true, however, if you carefully enter into the lending agreement, identify the best rates, and carefully analyze your financial need and your expected return.
And, because creditworthiness plays a significant role in your ability to secure affordable financing, short-term financing arrangements will carry less risk for those who have a strong credit score, reliable revenue, and history of positive repayment activity.
Build your personal and business credit to get the best financing
Regardless of what type of funding you choose, your eligibility, rates, and repayment terms will likely depend on your personal and/or business credit score. For that reason, you should always keep your score in mind when you apply for funding.
If your credit score isn’t ideal, you may want to consider making efforts to build credit before applying for funding. And, though business and personal credit are different entities, the steps required to improve either score are similar. Here are a few things you can do to take control of and improve your scores.
Get a copy of your credit report and review it for errors
If there are errors, you work with the credit reporting agencies to address them and have them removed from your report. Consumers are entitled to free annual credit reports from the major reporting agencies: Equifax, TransUnion, and Experian.
Business credit scores, which require you to have and use a registered employer identification number (EIN), can be obtained through numerous reporting agencies, though the top three are typically considered to be Duns & Bradstreet, Equifax, and Experian.
There is no current legislation that requires business reporting agencies to provide free credit reports, and many agencies charge a fee for each report. However, business owners can get access to business and personal credit scores through Nav.com.
Make regular, on-time payments
Your payment history is one of the primary indicators of your credit scores, and so making it a point to pay your bills on time every time can have a huge impact on your score. Failing to do so can have an equally significant yet negative impact.
Keep credit utilization low
Another factor that can affect your credit is how much credit you have (i.e., your combined credit limits) and how much of it you use, or your utilization. Though there is no golden rule that suggests how much is too much, most experts agree that keeping credit utilization below 30% can be beneficial.
Open a credit account and use it responsibly
By opening a credit account, be it a credit card or line of credit, you can increase your available credit and, if you keep balances low, work to decrease your credit utilization percentage. Further, by making regular, on-time payments, you can establish a positive repayment history and further improve your score.
Keep in mind that if you run up your balance or fail to make timely payments, then you can potentially do more damage than good. Further, if you want to improve your business credit, you will need to make sure that any applications are submitted using your EIN. Without that, the activity will not be reporting to the business credit reporting agencies.
If you need to secure business financing, it’s important to way all your options and choose the best one for your business. Though some situations require long-term financing solutions, when it comes to working capital, short-term business financing is often the best answer. If you’re considering this type of business financing, be sure to review your options, check rates, and select the financing solution that will offer the best ROI and fit in with your financing strategy.
This article was originally written on July 25, 2019 and updated on December 29, 2021.
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