Business Insights

Understanding Short-Term Financing Options for Your Business

There are many reasons why your business might need a cash infusion. Find the solution that fits your specific circumstances.

Even a successful small business can experience a cash shortfall. Perhaps you need to replace essential equipment, or you are experiencing a lag in accounts payable while bills are coming due. Or you have a chance to make a smart investment in the future of your business but lack sufficient operating cash to seize the opportunity.

Whatever the reason, businesses will need short-term financing at one time or another. When your business faces a temporary cash shortfall, you will want to take the time to explore your financing options and consider the pros and cons of each.

That means weighing factors such as interest rates, repayment terms, credit requirements and how quickly you can receive the funds. As with any important business decision, it may be helpful to consult with a financial professional as you review your choices.

Short-term financing can take many forms. Here are some commonly available options for small businesses.

Business Credit Cards

Easy to obtain and less complicated than a traditional loan, business credit cards can cover a sudden, unexpected expense or unplanned purchase. They may charge higher interest rates than other types of short-term loans, but their flexibility and convenience work well for on-demand usage.

Using your card responsibly can also help improve your business’s credit rating. Like personal credit cards, business credit cards can be misused or maxed out, and late payments can hurt your credit rating.

Business Lines of Credit

Many banks will offer businesses a line of credit, which allows you to borrow funds as needed, up to a predetermined maximum. Your monthly payments are typically based on your outstanding balance. Eligibility requirements, renewal options and repayment terms vary.

Lines of credit generally have higher credit limits than credit cards do, so you run the risk of borrowing more than you need—or more than you can pay back without incurring additional fees.

Commercial Bank Loans

You can get a short-term, fixed-rate commercial loan (usually 90 to 120 days in length) secured by collateral, such as inventory or, often, your personal home. You receive the funds in a lump sum and pay a fixed amount for the life of the loan.

In some cases, a bank will offer loans for specific needs, such as equipment financing for businesses that are seeking growth opportunities by procuring equipment that will keep them competitive.

U.S. Small Business Administration (SBA) Loans

Community-based lenders offer a variety of short-term SBA loans, such as micro-loans or SBA Express Loans. You can use the funds for working capital or to purchase machinery and equipment, furniture and fixtures, inventory and supplies.

Asset-Based Financing

This financing option can involve any one of several forms of collateral, including inventory or receivables (as your business collects receivables, those proceeds pay down a loan or line of credit). With an option called factoring, you sell your accounts receivable at a discounted rate to a company—called a “factor”—that then collects on them.

Trade Credit

Trade credits are business-to-business transactions, in which one business receives goods or services without paying cash up front. The buyer and seller agree to repayment terms, which may include penalties for late or incomplete payments. Trade credits can work well for businesses that have developed trust through a long working relationship. Conversely, they can be damaging to your business’s reputation and partnerships if the conditions of the agreement are not honored.

One Essential Caveat to All Credit Options

You will find many companies offering short-term financing options, such as payday loans and bridge loans. As a general rule, these options are not advisable for your business needs unless you truly have no other options. Some disreputable online lenders will offer loans at astronomical interest rates, for example, which may damage your ability to grow your business.

If you have a standing relationship with a bank or other lender, it is probably best to begin a short-term financing conversation with that firm.

Three Things to Do

• Think carefully about your short-term financing options and consult our business resource center.
• Explore cash management options if you are facing a temporary cash shortfall.
• Start a conversation with a financial institution you already know and learn more about its short-term business financing options.