For many growing small businesses, it is extremely important to be able to access capital, whether it is for increasing inventory, investing in infrastructure or simply keeping operations running. A short term business loan is one way to get quick cash when your business is in need. But there are different types of such loans, so it is important to determine the best short-term loan option that fits your needs when you need to secure capital. Read on to find out more about the 4 types of short term business loans that every small business owner should know about.
4 Short Term Business Loans Available for Small Businesses
Here is a look at the 4 common types of short term loans that small business owners should know.
The line-of-credit loan is probably the most useful type of short term loan for small business owners.
In fact, every business owner should permanently have this type of loan arrangement with their banker because it offers protection from stalled cash flow and emergencies.
A line-of-credit loan extends the cash available in the checking account of your business to the loan contract’s upper limit.
Each bank has its own specific funding method, but, essentially, it transfers an amount to the business’ checking account for the purpose of covering checks.
Interest is paid by the business on the actual advanced amount, from the time it is advanced to when it is repaid.
This type of short term business loan is money that is lent to a business to help in covering expenses until the arrival of specific anticipated income.
Small businesses often take out bridge loans from the banks to cover purchases of materials to keep production going or to cover payroll.
The loans are secured by banks using assets or by basing the loans on signed sales contracts or receivables of the business.
Bridge loans can last for as little as a couple of days to one whole year, often lasting a maximum of 90 days. Typically, this type of short term loan is used in real estate transactions to help in closing the gap between purchasing one property and selling another.
Merchant Cash Advances
This type of short term loan is not an actual loan – it is an advance.
Merchant cash advances are when lenders buy the future credit card sales of your business, essentially fulfilling the same purpose as short term loans. They are one of the most common and accessible type of funding for businesses.
However, you should bear in mind that merchant cash advances are a rather expensive kind of short term loan. This type of short term loan is a great option for small businesses as the approval process is easy and it gives you quick access to funds.
Additionally, business owners who have lower personal credit can access merchant cash advances, which are suitable for a variety of business purposes.
If a small business has a cash flow that is stifled by outstanding invoices, the business owner gets a solution to this specific financial problem with invoice financing.
Through this type of short term business loan, lenders advance you a percentage – in some cases, as high as 90% – of the worth of your outstanding invoice.
The advance that the lender provides will accumulate interest at a relatively slow rate, depending on the number of weeks your invoice is actually outstanding when you get your funding.
After your invoice is fulfilled by your customer, the lender will intercept your invoice’s remaining percentage, subtract and claim the accumulated interest, and then return the rest of the worth of the invoice to your business.
Because your outstanding invoice acts as a form of collateral, invoice financing is one of the easiest and most affordable types of loans to get all your short-term options.
Short term business loans can be of immense help to your small business when you need it the most. It might seem like it will entail loads of paperwork and waiting for long periods, most short-term loans can get you the funding required for your small business in less than a week.