Every business experiences cash gaps—those times when your income and expenses aren’t in synch, and you can’t cover all the payments you need to make. It’s not necessarily a sign that you’re a bad fiscal manager or that your company is in trouble. In fact, some cash glitches are caused by an excess of success, such as having orders for more products than you have the cash to produce.
When the problem is temporary—you have money owed you, but it won’t arrive in time—the best answer is often short-term financing. Short-term financing is usually defined as loans or lines of credit with terms of a year or less. While the interest rates are generally higher than those for long-term loans, the funds can be easier to obtain, and you typically get them more quickly. The range of short-term financing options includes:
- Business credit cards. Easy to obtain, business credit cards may have higher interest rates than other types of short-term financing, but they offer the most flexibility in terms of on-demand use. One note: It can be easy to over-extend yourself using credit cards, so use them judiciously.
- Business Lines of credit. A business line of credit sets a maximum amount of funds available from the bank, which can be used when they’re needed. Line-of-credit periods generally start at 90 days and are often renewable as needed. Again, caution should be urged with credit line use, as it can be easy to over-spend. “With a credit card, you generally have a lower ceiling, so you won’t be able to overspend, as opposed to a credit line that may have a $50,000 or $100,000 limit,” observes Ray Weidmann, CPA, CFP.
- Commercial bank loans. Short-term, fixed-rate commercial loans—usually 90 to 120 days in length—can be secured by collateral, (i.e., inventory and, often, your home).
- U.S. Small Business Administration (SBA) loans. The SBA offers a variety of short-term loans such as micro-loans or SBAExpress Loans from community-based lenders. The funds may be used for working capital or to purchase machinery and equipment, furniture and fixtures, inventory and supplies.
- Asset based financing. This includes using receivables as collateral (as your business collects receivables, those proceeds pay a loan or line of credit); inventory financing, which uses inventory as collateral; and factoring, in which accounts receivable are sold to a company—called a “factor”—that exists to purchase these accounts at a discounted rate and then collects on them.
- Trade credit. This is really more of an agreement with suppliers to extend payables or utilize installment payments than a true extension of credit.
A final caveat: Short-term financing is offered all over the Internet by disreputable companies trying to get their hands in the pockets of business owners with cash troubles. Be careful when you borrow, and about whom you borrow from. You probably already have a good financial relationship established with a reliable bank or other lender. If you need to close the cash gap, talk to them first.
