Short-term lending may be a familiar concept on a personal level, but this type of lending is not just limited to individuals. At times, your small business may run low on capital, particularly in the early stages, and seeking alternative loans can help mitigate minor setbacks. Explore some of the most common sources of short-term loans for small businesses and the most common uses for these funds.
The process of securing a short-term loan for a small business is a little different than taking out a personal loan. For example, business owners who seek a short-term loan can often request larger amounts of capital than what’s available to individual consumers, and most lenders require proof of business income and other information certifying that your business is legitimate.
Why a Business Owner May Need a Short-Term Loan
Business owners may seek a short-term loan for a variety of reasons: to cover supplies or other expenses while waiting on invoices to be paid, or when dealing with unexpected business expenses or bills. These situations are more urgent in nature than recurring expenses, and the traditional bank loan process can be much too lengthy for these types of emergencies.
Another possible reason a small business may seek a short-term loan is to make payroll. Delivery of pay on time is critical to retaining employees, and depending on your circumstances, your ability to pay your employees in a timely manner may depend on external factors such as timely invoice payments, prompt receipt of product, or market fluctuations that can temporarily affect your working capital.
Much like consumer payday loans, small business short-term loans typically offer an easy approval process, quick funding, and clear-cut repayment terms. Similarly, rates will vary depending on the lender, and because these loans are designed to be used on an emergency basis rather than as a long-term strategy, you will know upfront how much the loan will cost.
Short-Term Business Lenders
Short-term loans for businesses are not widely publicized, so there aren’t nearly as many lenders to choose from when compared to community-based short-term lending for individual consumers. However, there are still several to choose from, each serving the purpose of giving business owners funds on short notice, and each offering something slightly different than the others.
One option is Kabbage, which offers business lines of credit. Signing up takes only a few minutes, and businesses can obtain up to $100,000 on simple terms. The company has doled out more than $1.6 billion to small businesses since its inception. Similarly, OnDeck offers business loans from $5,000 to as much as $500,000, and lines of credit from $6,000 to $100,000. It also has a quick application process, and businesses can receive their funds in just 24 hours in some instances. OnDeck boasts an A+ rating from the Better Business Bureau as well.
Yet another option is Dealstruck, although it does impose more requirements. However, it may work for you if your business has at least $150,000 in annual revenue, you’ve been in business for at least one year, and your personal credit score is higher than 600. In addition to loans, the company also offers inventory lines of credit, in which you are able to use your inventory as collateral in exchange for a revolving line of credit.
Besides these options, businesses may also benefit from invoice factoring, which allows small business owners to sell their invoices to an invoice factoring company in exchange for cash up front. Essentially, you are paid in advance for pending invoices, and the factoring company is paid when your customers remit payment. Business owners are then required to repay the loan with interest, typically within 30 to 60 days. BlueVine and Fundbox are two Internet-based companies providing invoice factoring to small businesses.
What You Should Know
While short-term loans and invoice factoring can help business owners in a time of need, it is important to fully understand how these alternative financial resources may affect your business in the long run. Avoid being overzealous when requesting a loan, and never borrow more than what is really needed to address your particular circumstances. If you enlist the services of a business accountant, be sure to discuss your decision with them prior to taking out a loan. An advisor can give you advice on how much you actually need, how the loan will affect your business, and even how the loan could affect you personally.
Whether you choose a short-term business loan or opt for invoice factoring, you can rest assured that there is most likely a solution for the unique needs of your business. Having access to funds when you need them the most can provide you with peace of mind and give you insight on just what it takes to be prepared for unexpected events in the future.
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