Many SMEs reach a point when they need an influx of cash. A short term business loan could provide the money to smooth out a temporary shortfall in working capital (perhaps due to seasonal sales fluctuations), to cover unexpected expenses or to finance a specific growth opportunity. Let’s take a look at the short term finance options to consider;
The Top 5 Most Popular Short Term Business Loans
Unsecured Business Loans
These days there are many lenders who specialise in offering unsecured short term business loans. Unlike the banks, these alternative lenders will often act very quickly, responding instantly to applications (with very little paperwork) and providing cash within a matter of days, or even hours, once approval is given. They tend to be much more risk-tolerant than traditional lenders, and may be willing to offer funds to businesses that would immediately be turned down by banks because of short trading history, what industry you are in, a lack of personal assets or even bad credit. But of course, the higher the risk you pose, the more you are likely to pay for your unsecured business loan.
$5k - $250k
3 - 12 months
Weekly or Daily
Businesses with high daily turnover
Missed payments will incur fees, which can quickly accumulate, so it’s vital that you have the cash flow to keep up with your obligations.
There’s a good chance you’ll be asked to provide a personal guarantee of your short term business loan, which means that your home or other assets could be at risk if your business is unable to keep up with repayments.
Business Credit Cards
Business credit cards are great for essential purchases, such as office supplies, as they offer the convenience of easy online or in-store shopping – and enable you to delay payment for several weeks. There may also be incentives in the form of rewards, discounts or benefits like free insurance, which can make business credit cards more economical, if used with care. Almost 70% of Australian small businesses have business finance once a credit card is included. See the following graph.
And the next graph shows that just under half of all small businesses have a loan facility, when credit cards are excluded.
Many business credit cards offer an interest-free period on purchases – but what that means in practice is that you have until, say, 21 days after the end of the month to pay off the full balance and avoid paying interest on that month’s purchases.
If you don’t completely clear the balance, you’ll pay interest on the remaining balance from the date you made the purchases (i.e. no interest-free days). Credit card interest rates are among the highest lending rates, so it’s very important to avoid getting stuck with a large credit card balance. As well as interest, many credit card facilities have annual administration fees. Low-cost cards with no facility fees may have longer interest-free periods and lower interest rates, but tend not to offer rewards.
A business overdraft works just like a personal overdraft and will usually be attached to your trading bank account. You can expect to pay an annual fee for the service, and make a monthly interest payment – although the interest will actually be calculated daily, based on the amount you have drawn on your overdraft. Overdrafts are an ideal fall-back for your working capital, so that you can cover regular bills (utilities, tax instalments, insurance payments) as they fall due, even if your income is inconsistent.
Line of Credit
A business line of credit is a bit like an overdraft – it’s a facility that lets you withdraw funds, repay them and withdraw them again, as often as you like. Usually you’ll pay a facility fee and then interest on the daily balance, just like with an overdraft. The difference is that a line of credit isn’t attached to your trading account with your bank – it’s offered by a lender using your liquid assets (such as stock and accounts receivable) as security. Usually the lender will provide a line of credit up to a percentage of the value of those assets (say 80%). Unlike credit card applications and bank overdrafts the application process can be quick and efficient if you approach an alternative lender, but the interest rate will probably be high.
If you offer credit terms to your customers, invoice finance can boost your cash flow without going into debt. Rather than borrowing, it involves selling your accounts receivable to a factoring company, who advances you up to 80% of the face value of the amount due to you, and then takes responsibility for collecting the debt. Once your customer pays their invoice the factor company deducts a fee then pays you the difference.
There are two different types of factoring:
– The risk remains with you. If a customer doesn’t pay their invoice, you will need to buy back the invoice and chase up the customer yourself.
– The risk belongs to the invoice finance company. If a customer doesn’t pay their invoice, you will receive no additional payment – and you also don’t have to deal with the hassle of collecting the outstanding debt, and you get most of the cash without having to wait out the credit period.
You may want to consider how your customer will be treated in the event they do not pay the invoice finance company as this could directly impact whether you do business with them again.
Short Term Business Finance Fundamentals
It’s absolutely crucial that you don’t use any form of short- term finance for the purchase of major assets that you’ll need to pay off over a long period.
There’s no guarantee of getting a short term business loan renewed at the end of the initial term.
At-call facilities often attract fees and charges as well as interest, since you’re paying for the convenience of having access to funds even if you don’t actually use them (and therefore pay interest on them).
After all, by making those funds available to you, the lender is forgoing the chance to earn interest on them somewhere else. It’s important to calculate the cost of your business loan before you enter into any formal agreement.
Top five short term business loans
Here’s a quick comparison of the top five short term business loans in Australia. Scroll up to find out more about each of these short term loan products.
|Short Term Loan Type||Description|
|Unsecured business loans||A short term unsecured business loan is repaid in regular payments over an agreed period of time. They’re usually for a specific purpose. For unsecured short term loans, the term is usually between 3 to 12 months.|
|Overdraft facilities||An overdraft allows you to go into a negative balance in your business trading bank account. You pay interest on the amount you have drawn, calculated daily.|
|Business credit cards||A business credit card can be a flexible source of cash flow. Interest-free periods can make them an economic short term loan option.|
|Lines of credit||A line of credit, also known as a cash advance, or revolving line of credit, provides you with access to a specific amount of funds. You can use part or all of the funds and pay it back and use it again and again. You only pay interest on the amount drawn.|
|Invoice finance||Invoice finance is when you sell your invoice receivables to a factoring company in exchange for an immediate payment of up to 80% of the face value. When a customer pays their invoice, the factoring company take their fee and pay you the remainder.|
What is the definition of a short term business loan?
A short term loan is a type of business finance that can be arranged quickly and paid back to the lender over a short period of time. A common reason for getting a short term loan is to raise working capital to cover temporary expenses.
What is the interest rate for short term business loans?
Interest rates for short term business loans differ from lender to lender, as do the methods used for calculating the interest. Rates are risked based, the higher the risk the business is, the higher the rate is. A typical interest rate ranges from 10 to 25% per annum.
What are short term financing options?
The most common options for short term business loans include unsecured business loans, business credit cards, a business overdraft, a line of credit and invoice finance.