Businesses can suffer from a revenue shortfall due to all kinds of reasons, such as the loss of a major client, seasonal demand changes, economic uncertainty, or even a global pandemic. Here, a very specific type of financing can be helpful called short term financing.
Short Term Financing Explained
Short term financing is a type of financial product offered by lenders with a short repayment period, ranging anywhere from a few weeks to a year. Businesses use short term financing to meet immediate needs such as paying salaries, repairing equipment, or purchasing inventory for a new business opportunity.
Why is Short Term Financing Important?
Short term financing is important for many reasons. For one, it can be secured quickly. Unlike long term financing, which can take weeks or even months to secure, some kinds of short term financing can be obtained within a matter of days, ensuring that a business has capital in a timely fashion.
It can also help resolve problems that are vital for sustaining day-to-day operations and maintaining stability. It allows businesses to take advantage of time-sensitive opportunities, such as purchasing inventory at discounted prices or investing in marketing campaigns to boost sales.
Short term financing gives businesses some flexibility, too. Unlike long term financing, a business can borrow money for a short term period and pay less interest overall. In addition, short term financing can help small businesses build credit. By consistently making timely payments, businesses can build a strong business credit history, eventually qualifying for better terms and conditions on future loans.
Exploring Different Types of Short Term Financing Options
There are several short term loan types available to businesses, each with its own features and considerations. Let’s explore some common ones:
Canadian Small Business Loans
A good Canadian small business loan from a certified lender is a popular choice for Canadian entrepreneurs looking to secure short term funding. These loans provide businesses with the capital they need to cover operational expenses, purchase inventory, or invest in expansion.
Short Term Merchant Cash Advance
A short term merchant cash advance is an alternative financing option that allows businesses to receive a lump sum payment in exchange for a percentage of their future credit card sales. This option can be appealing to businesses with fluctuating cash flows or those that do not qualify for traditional loans. However, businesses should carefully consider the terms of an MCA. Less reputable lenders may take advantage of an applicant with predatory loan terms.
Businesses can use Levr.ai to safely apply for an MCA. One of the biggest advantages of using our small business loans platform is that we only connect businesses with certified lenders.
Short Term Debt Financing
Short term debt financing involves borrowing funds from lenders for a fixed period, usually less than a year, and repaying the debt with interest. This type of financing can be used to cover working capital needs, bridge temporary cash flow gaps, or finance specific projects.
For more accounting information, please check our guide to find how to find short term debt on a balance sheet.
The Canada Emergency Business Account loan, also known as the CEBA loan, was a government program designed to provide financial support to small businesses affected by the COVID-19 pandemic. This interest-free loan offered up to $60,000 in funding to eligible businesses, with a portion of the loan forgivable if repaid by a certain date.
Small Business Equipment Financing
Businesses can acquire the necessary equipment without making a large upfront payment by using suitable small business equipment financing options. Equipment financing options include leasing, equipment loans, and equipment lines of credit.
Business Line of Credit
A business line of credit provides entities with a predetermined credit limit that can be drawn upon as needed. Interest is only charged on the amount borrowed, making it an ideal option for managing fluctuating cash flow or unexpected expenses.
Invoice financing involves selling your outstanding invoices to a creditor at a concession in exchange for instant money. It can be especially helpful for companies that experience long payment cycles or need to fund large orders.
How to Find the Right Short Term Financing Solution for Your Business
Consider these factors when exploring short term financing options:
- Business goals and needs: Identify the purpose for which you require short term financing and consider how each option aligns with your business goals.
- Repayment terms and interest rates: Evaluate the terms and interest rates linked with each funding option to ensure they are favourable and sustainable for your business.
- Application process and eligibility: Understand the requirements and eligibility criteria for each financing option to determine if your business qualifies.
- Risk assessment: Evaluate the risks linked with each financing option and consider how they align with your risk tolerance and overall business strategy.
Optimizing Your Short Term Financing
Although short term financing is an important type of funding, it’s important to implement the right strategies to make the most of it.
- Carefully assess your business’s requirements and only borrow the amount you need.
- Develop a roadmap to ensure you spend the funds effectively.
- Look at multiple options and pick a reputable lender with favourable terms.
- Stay on top of your payments to keep your cash flow and small business credit healthy.
Short term financing can be a very useful option for your business, whether you’re trying to manage operating costs or take advantage of new opportunities. Remember to assess your needs, research available options, negotiate favourable terms, and create a comprehensive financing plan. With the right approach, short term financing can propel your business forward and unlock new opportunities for expansion and profitability.