When in need of financing, there are generally two types a business can apply for: long-term and short-term. Long term financing usually applies to larger expenses, such as equipment or real estate, where the return on investment will happen over time. These loans are usually paid off in a period of one to seven years, or sometimes may not reach maturity until ten or twenty years. Short term financing is for a much shorter time period, usually one year or less. Short term loans are generally used to cover an immediate need that the business expects to be able to recover very quickly, such as working capital needed to cover a temporary deficit or a seasonal investment that will garner quick returns.
When applying for short term financing, you should expect a rigorous approval process. Some traits that lenders are looking for include a good credit history, sufficient working capital, potential collateral, and a solid history of positive cash flow. Lenders often require 3 to 5 years of financial statements, so be prepared with solid documentation. It is also important to recognize that there will usually be required loan fees. Even with collateral used to secure the loan, loan fees can average around one percent of the loan amount.
Short term loans are appropriate for established businesses that are able to demonstrate a strong financial history. This demonstrates to the lender a good likelihood that the loan will be repaid during the time period, even if current capital is lacking. Short term loans can also be good for start-up businesses or those currently struggling, as they do not present as great a risk to the lender as a long term loan. A business in one of these situations will usually need to present documentation to the lender of realistic projected income. They will need to explain where the income will be coming from to pay off the loan.
Interest rates on short term financing can vary, depending on the economy and other factors. In a recession economy, this type of financing can have a lower interest rate than long term financing. Short term interest rates are usually calculated on the prime interest rate in addition to a premium. The premium is calculated based on the level of risk that your business poses to the lender.
Short term financing is essential for businesses to be able to cover temporary gaps in capital, expand into new markets, buy updated inventory, and grow. The correct use of short term loans can help businesses thrive in spite of difficult times in the economy or a short term lack.
Contact us today to learn how we can customize a short term financing option for your business!