Short Term Financing: 5 Different Options for Your Business

December 1, 2020

Every small business owner reaches a moment where they need to find funding.

Whether it’s to cover an expense or grow the company, how you raise funding depends on quite a few moving parts: the type of business you’re managing, your goals and the situation your business finds itself in. Applying for funding can be a stressful and time-consuming experience, which is why it pays to be aware of your options beforehand and make a plan. 📜

When to get short term financing

The first task that comes with finding short term sources of finances is to first identify why you need financing. Many lenders will want to know the reason you’re getting financing, and you’re also a lot more likely to use the money appropriately if you have a plan in place. Here are a few possible reasons:

  • To cover a large expense (e.g. new equipment)
  • To grow the business (e.g. hire staff)
  • To help with cash flow fluctuations (e.g. if your sales are seasonal)
  • To pay off a debt
  • To help get through a difficult period

In general, short term financing is usually for working capital or immediate needs; it’s easier to qualify for, you’ll receive the money relatively quickly and the repayments won’t be longer than a year. Short term loans or funding are also more expensive and will require weekly or daily payments. If you’re looking for extended support or uniquely large expenses, long term financing might be more appropriate.

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Types of short term financing:

1. Small business loan

This is your average small business loan to use for working capital such as staff salaries, goods and services and daily operations. These loans can range between a month to a year and can be processed by a bank or specialist lender. Your business will likely receive a lump sum at the beginning, and you’ll need to pay it off with interest on regularly scheduled payments. If you’re applying through a bank, your business plan will be studied carefully and it may take longer to access funding. If your company is relatively new, you may be better off going to a specialist lender.

Small business loans are a little more expensive with interest rates of around 10% but are a good option if you need quick and easy access to working capital. As a founder, you will be required to have a high personal credit score in order to apply for the loan.

2. Equipment finance

Equipment financing is a type of short term loan that works great for capital or equipment heavy businesses. With this type of loan, you essentially use your current equipment or items you want to purchase as collateral. This makes the loan a lot more secure for the lender and therefore a lot cheaper and easier for you. There are several types of equipment financing such as renting before purchasing, paying in full over a specific period of time or renting for a monthly premium.

If you need a new coffee machine, printer, or other large equipment, this type of short term financing is a good way of obtaining funding.

3. Line of credit

With a line of credit, your business has direct access to credit whenever it needs. Like a credit card, you only pay interest on the amount you borrow. The line of credit will require some sort of personal guarantee (such as a house or car), but it’s a lot more flexible than other types of financing. It usually has a lower APR than credit cards and can last up to a year.

A line of credit is a good type of financing for businesses that are more seasonal and have unpredictable cash flow - it acts as more of a long term solution so businesses have access to funds whenever they need to. You can apply to lines of credit through alternative lenders such as Drafty and Polar Credit.

4. Equity finance

Equity financing is another financing option for startups that are looking to grow. Equity financing is essentially exchanging ownership of your company for money. You offer shares to angel investors, VCs and outside investment, in exchange for capital.

Although the funds are processed quickly and there are opportunities to raise a large amount of money, you will need to sacrifice some control over your company. This type of financing is usually best for companies that are looking to expand and grow their customer base.

5. Invoice finance

Invoice financing is a good option for B2B businesses that deal with clients and send invoices. If late payments cause serious cash flow issues and your business requires more predictable and steady revenue, invoice financing allows you to use your invoices as collateral. How does it work? You send the invoice, a specialised lender pays 50% - 90% of the total invoice upfront and then you reimburse them once your client pays - along with a fee.

This type of funding is ideal for business owners with a low credit score who need funds quickly. The main issue is that these lenders can charge quite a large fee, and it can be an expensive short term financing option in the long term.

Read more: What Are the Invoice Requirements in the UK?

Why do short term financing?

Short term financing is a good way to gain access to funds relatively quickly without committing to anything long term commitment. That’s why they are good for emergencies or for a cash injection. Many of these funding options won’t require an extremely high credit score as others, which is why they can be a lifesaver for small businesses.

If you’re a business that is struggling to pay expenses or badly needs a cash injection, short term financing can be a good way to help get through a difficult period and encourage growth. If your issues are related to the Coronavirus pandemic, the UK government has also issued support through the CBILS scheme.

At Pomelo Pay, we help small businesses improve cash flow management by enabling payments with QR codes and payment links. By accepting payments with QR codes, your customers can pay from the comfort of their home, at a safe distance and in a much more secure way. As a business, you receive your funds the same day and can also start accepting click and collect through our free online shop. Interested in trying us out? Get in touch with our Sales Team today.