Choosing the Best Short-Term Financing Option that Suits Your Business
There is no perfect business. The flow of your market may fluctuate at times, depending on various factors. The imbalance of supply and demand, the rise of business competitors, or the decrease of purchasing power of your customers, just to name a few. For whatever reason why your business flow is fluctuating, it isn’t a good sign for its operation.
The inconsistency of your market flow may affect your business in more ways than one. Ranging from low-income generation to, at worst, filing bankruptcy or visiting a bankruptcy law center for advise, these complications can be harmful to your financial status and your business. One that is most affected by such fluctuations in the daily operating expenses.
These expenses include taking care of repairs, purchasing inventories, using lender credits to pay closing costs, meeting payrolls, and handling other miscellaneous expenses. Although these are short-term problems, these may pose a threat that leads to future complications. For your business to survive fluctuations, it is best that you engage in short-term financing.
When a borrower pays off a loan over a shorter repayment period, the borrower engages in short-term financing. A repayment period can span from a couple of months to under a year. Some lenders usually describe loans with an 18-month repayment period as short-term. The advantages of short-term financing are that it provides quicker funding, easy qualifications, and lower total cost of capital. Because fluctuations are mostly temporary, short-term financing is a way to aid financial instability.
There are many options that you can engage in for your short-term financing. Ranging from trade credit to title loans, the list below will help you choose the best option that suits you and your business.
Line of Credit
A plausible way to provide for your basic day-to-day operations in your business is to have a working capital line of credit. Functions much like a business credit card, a line of credit extends a short-term credit limit to businesses so business owners can spend as much as they need up to a specific threshold.
Unlike the traditional way of funding, businesses only have to pay back for what they have spent when using this type of credit. It works by drawing a certain amount of money from your line of credit and pay it in a set amount of time with the added interest. When you have already paid your debt, your credit lines get to be refilled and go back to the original amount.
The advantage of utilizing credit lines is that the annual percentage rate tends to be lower than business cards. As a bonus, when you withdraw money from your credit line, it commonly doesn’t need additional fees.
Trade Credit
Primarily when your business deals with manufacturing or merchandising, trade credit is for you. When you have already gained the trust of a supplier, you can actually apply for trade credit. It works by extending credit to you by the suppliers, where the suppliers let you buy now and pay later. Expenses from the delivery of materials, equipment, or other valuables can belong to trade credit.
To gain a trade credit, you must first earn the trust of your supplier. To obtain the trust of your supplier, you must pay your bills on time. At first, suppliers don’t offer trade credits. They always prefer cash on delivery or advance payments. However, if your supplier is lenient, you can still negotiate trade credit with the help of a properly prepared financial plan.
Sometimes, suppliers agree for interest-free credit. When you buy a product or service from your supplier, they usually give you time to pay what you owe with no additional cost. The span for repayment for trade credit usually takes up to a month, depending on the agreement between you and your supplier. The longer the amount of time for you to pay what you owe, the more amount of money can be retained inside your business to fund other initiatives.
Title Loans
When your business can no longer cope with running expenses, you may have to opt for a title loan. This short-term loan is where you usually get money for handing over your car or any high-cost property to your lender. Your property becomes the collateral for the loan. The lender always checks if you have a title or full possession of the property in order to have a clear loan. The lender then puts a legal lien on the property.
Such loans are easy to get. However, the downside of pawning your property is that the interest rates range from 35 percent to 100 percent annual percentage rate. If not paid on time, the lender will get your car or property and sell it to bring back the money they have loaned you. If you see that your business can significantly profit from short-term financing, you can plan to pay off the loan in a shorter time to repossess your property.
Takeaway
No matter how you see it from different angles, short-term financing always poses higher interest rates than long-term options. That said, your business should earn more than enough profit so you can repay your debt as early as possible. With careful planning and accurate financial management, you can get over any market fluctuations and achieve a stable flow of money.
*This is a collaborative post.
