Almost every small business hits a cash flow crisis from time to time and when they do, a short-term loan can be the answer.
As the name suggests, short-term loans are intended to be paid off in months (usually 6 to 18) rather than years, which means they’re more suitable for dealing with sudden problems than purchasing strategic assets that will give you many years of service.
In general, short-term loans can be processed more quickly than their larger and longer-term counterparts, meaning you’ll receive the money faster. (If you find yourself in a corner, we can even get money to you within 24 hours via an Emergency Loan.)
You’ll probably find yourself paying less interest than for long-term borrowing too, due to the short period of the loan (even though the headline interest rate may be higher). Finally, this type of finance is normally easier to qualify for, and as an added bonus there’ll be less paperwork.
So, what are the key types of short-term loan and what do you need to know about them?
1 Structured loan
With a structured loan, you borrow an agreed amount of capital and repay it over an agreed period, usually paying a combination of capital and interest each month.
A short-term loan can either be secured or unsecured, with the former generally attracting lower interest rates as the lender’s risk is reduced. The fixed monthly repayments will help you to budget and plan your cash flow, though you may struggle to make them if you hit a seasonal downturn or a major customer fails to pay an invoice on time.
2 Line of credit
Operating like an overdraft, a line of credit gives you a limit against which you can borrow and repay at will. This ultimate flexibility to makes a line of credit a valid alternative to a business credit card, and the good news is that the interest rate is likely to be lower (though still relatively high compared to a structured loan).
3 Merchant cash advance
A merchant cash advance involves borrowing an agreed sum and repaying it via a fixed percentage of your daily credit card sales. The advantage is obvious: because repayments are linked to sales, you’ll never face a large repayment during a quiet period. The drawback? This is by far the most expensive way to borrow, attracting substantial interest rates.
4 Invoice factoring and discounting
Invoice finance can tame a troublesome cash flow for good by allowing you to borrow against the value of your invoices as soon as you issue them (at Cashsolv, we’ll lend up to 85%).
Repayment is then made when your customers pay you. With factoring, we’ll assign experienced credit control professionals to secure early payment, whilst with invoice discounting you retain control of your own debtor ledger.