Last updated on November 27th, 2017 at 10:55 pm -
Short-term debt financing can be defined as a loan or line of credit. This is any form of funding that requires business owners to repay the funded principle with interest. The financing can be in the form of money or resources needed to run your business. The defining feature in debt financing is repayment on the part of the recipient of the loan to the financial institution or lender. There are a variety of debt financing options small business owners can choose from. Each debt financing option is defined by the purpose for which it is borrowed and the amount of time given to repay it. LenCred offers short-term debt products for shorter repayment periods. It also offers long-term debt products for longer repayment periods.
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Types of Short-Term Debt Financing You Can Apply for Online
Loan products have evolved from the traditional bank products. This has been attributed to the rapidly growing lending market online. Lenders have developed a variety of loan products like short-term debt financing online for small businesses. Loan products are used in financing various activities, but the majority are used as a source of working capital. These products include merchant cash advance, term loans, equipment loans, line of credit loans, invoice financing, and SBA loans.
Merchant Cash Advance
A merchant cash advance is a company debt offered by a merchant capital provider to a small business in form of a liquid cash surplus payment. These liquid funds form working capital for a small business, which is traded for an agreed upon percentage of future sales. The repayment process involves the provider making daily deductions on sales made till the loan is fully paid. The deductions normally service the principal and an interest set by the provider.
These are the traditional bank loans. A debt-financing provider will offer a term debt to finance a specific purpose. This debt is then paid in a fixed term with a fixed interest rate too. Term loans can be long-term or short-term.
As the name suggests, these are loans granted to finance the purchase of small fixed assets for a small business. This is a good source of finance to purchase machinery and other equipment needed in your business.
Line of Credit Loans
Line of credit loans are offered to offset an impending challenge in the undertakings of your business. Credit cards are an example of short-term debts. Hence, this short-term debt financing can be used to service a variety of needs for small business owners.
Invoice financing is a short-term debt offered by a lender to a business to offset the challenges arising from a delay in payment for services rendered to clients. This debt increases working capital which could have been affected with delays in receivables. Lenders offer up to 97% of the value of invoices upon approval. The remainder is advanced slowly depending on the amount of invoices being repaid.
The Small Business Administration is a federal agency that offers three programs that help small businesses gain access to short-term debt financing online and other alternative funding sources. These programs include the 7(a), microloan and CDC/504. The 7(a) loan programs are open, easy to access and a small business can secure funding for up to $5 million. Microloan programs cater for the smallest enterprises with one entrepreneur that rarely get funding from many lenders. CDC/504 loans can be both long-term and short-term. These loans are ideal to small businesses which plan on buying a key fixed asset like land or building. In long-term CDC/504 loans, the repayment period can go up to 20 years with interest being controlled by the existing treasury interest rates.
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How Do You Get Short-Term Debt Financing?
There are a number of requirements for separate loan products set in order to secure financing. These requirements are dependent on the lender and the nature of product sought after. There is no fixed plan to going around securing these loans especially if you do not meet the requirements. However, practicing the following steps and knowing of alternatives can help a business owner secure funding.
First, establish what sort of short-term financing you need. Knowing where to use this debt will focus your financing. This will save you time and angle your applications to the specific lenders for your needs.
Secondly, find a good source for your debt financing. This involves looking for financiers. These sponsors include financial institutions, friends, fellow businesses or suppliers. The source can be also be diverse. Short-term debt financing online sources are on the rise and offer flexible services that offer loans to applicants quite easily. LenCred is here to help business owners get short-term debt financing like unsecured business lines of credit.
Third, check whether you qualify for their loans. Different financiers will set different requirements for financing for the various loans.
Lastly, go with the cheapest financier. A loan like any other debt requires repayment. It is a financial commitment that can a times be straining on your working capital. Therefore, you need to choose a simpler and cheaper alternative. A less stringent repayment option, cheaper rate and non-collateral or non-asset-backed loans should be the ones to apply for. Short-term debt financing online like unsecured business lines of credit via LenCred is a perfect start.
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Where to Use these Short-Term Loans
Term debts are the easiest of options for small businesses’ debt financing. These can be sought out for a variety of purposes. Their uses depend on one’s ability to service the monthly payments and the interest rate floated. Most of the short-term debt financing online sources are term loans.
Merchant advance loans are easy to access because they have easy-to-meet requirements. These loans are favorable for seasonal businesses that struggle in financing daily expenses during the off-peak periods.
SBA loans can be used for various needs. These loans are ideal for small businesses because of their affordability and flexibility. CDC/504 loans can be used to buy land, do upgrades on your production technology, renovate a building or buy a production plant. They cater for the greatest of fixed assets purchases. Microloans can be used by a solopreneur to expand their activities and business altogether. And 7(a) program loans can be your choicest alternative to term loans.
Equipment loans can be used to buy machinery and equipment for your business. Unlike other asset-backed loans, equipment loans are easy to access. This is because the machinery or asset you buy acts as collateral hence you do not require a separate collateral.
Line of credit loans can be used to pay off debts, service your inventory and raise your working capital to facilitate activities in your business. They are flexible and easier to access.
Invoice financing can be used to shield your business from absorbing perils resulting from that delayed payment. Also known as accounts receivables financing, this can be used to buy inventory, pay off debts like government loans or service other immediate business needs.