In 2019, 45% of SMEs used external financing to fund their business, up from 35% in 2018. And within this, . Offering a great alternative to more traditional, long-term funding options, short term loans can be incredibly valuable to businesses of all sizes, across many sectors.
So what do you need to know to find the right quick business loan provider for your company?
Let’s dive in…
Short term, or quick business loans, are a good option if you need extra capital with a fast turnaround. Unlike a traditional loan, which is typically paid off over a few years, short term loans are typically structured so you pay them off in 12 months or less. They also tend to be for smaller amounts, making them ideal for covering unexpected shortfalls or dips in cash flow.
The four most common types of short term or quick business loan are: term loans, asset financing, invoicing financing and lines of credit. Let’s explore each in more detail…
Term loans are for a fixed amount and need to be repaid within a fixed timeframe. They can either be secured (backed by an asset) or unsecured, depending on the loan provider and your business needs.
An asset finance loan is used to gain access to new or upgraded business equipment. However, rather than buying the goods upfront, a business will lease them for a pre-agreed length of time. This helps companies utilise machinery, vehicles, technology, or any other asset that they can’t afford in full right now.
Invoice financing enables businesses to borrow money against outstanding accounts receivables (unpaid customer invoices). In this arrangement, the loan provider will agree to ‘buy’ the debts off you, giving you the cash upfront – when the invoice is eventually paid, so too is the loan (plus a small fee). Invoice financing is an umbrella term, covering invoice factoring and invoice discounting, which work similarly but with one key difference: in factoring, the invoice becomes the loan providers responsibility to chase up.
A line of credit is the most common type of borrowing mechanism for small businesses. Your lender gives you a maximum amount that you can spend, and if you don’t repay it within the specified timeframe, they’ll start charging you interest.
Now that we’ve covered some of the basic types of short term loan, let’s take a look at why this method of funding can sometimes be more beneficial than traditional loans.
You can’t be fully informed without the full picture. So let’s take a look at the potential risks of short term loans.
The key thing you’ll need to consider when taking out a short term business loan is how much you plan on borrowing. Of course, you should pick a loan amount that won’t leave you with debt you can’t afford to pay off.
You’ll then want to determine how quickly you can repay the loan. The faster the better in terms of your interest, but make sure you keep things realistic.
Finally, you’ll want to determine the overall amount that you can afford, not just the amount that you need to borrow. This includes fees, interest, and early repayment fees. The APR takes all of these things into account to make things easier for you.
To be eligible for a short term business loan you will need to supply or prove:
Short term business loans are much more flexible when it comes to credit scores than standard loans.
If you have a poor credit score, you can offset this by paying higher interest rates and staking collateral. This won’t guarantee that every lender will approve you, but it could increase your chances.
Short term loans are not the only form of quick, flexible funding available to small businesses. You could also make use of a:
Merchant cash advances are designed for businesses who make their revenue through credit and debit card sales. Here, you borrow a sum of money from a lender by offering a percentage of your future sales in return. You’ll keep paying these revenue instalments until the total debt has been repaid. The key benefit here is that if you don’t earn, you don’t repay.
Business credit cards are another option worth considering. However, they tend to have stricter approval requirements and a longer application process which makes them best suited to established businesses looking to expand and grow.
You can apply for one through your bank, or by applying to specialist online lenders. Some lenders promise a 24 hour pay out, if you need extra capital with a fast turnaround.
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