At each stage of business, there comes a time when extended financing is needed to maintain productivity, pay vendors, or cover payroll. Even mature companies with revenues in the millions need an influx of funding to stay current. Keep these three best sources of short-term loans for business in mind when the need arises.
There are three sources of short-term funding options available that cover most firms who want to secure financing that fit well whether a company is in either a startup or expansion phase.
1.Trade Credit
Trade credit is sometimes referred to as “spontaneous financing.” The term refers to financing accounts payable activities happening automatically during the ordinary course of doing business. For new or small companies, accounts payable may be the only accessible form of credit. Bank financing may be difficult to obtain during the early years of a new business.
Startups or small businesses can obtain 30 to 60-day trade credit from their suppliers as a component of their on-going financing. If the decision-maker makes wise inventory decisions, it can be sold within 60 days to pay the bill in full when it comes due. This is a much better deal than using a line of credit or method that charges interest. Here is a short video explaining the financial concept that is recognized worldwide.
2. Commercial Bank Loans
Commercial bank loans are difficult to obtain. Banks are usually reluctant to issue long-term capital loans to small firms or startups. They are more often willing to offer short-term demand loans, seasonal lines of credit, and single-purpose loans for equipment or inventory. Most local banks will extend loans to businesses with whom they have a good relationship even more so if they are comfortable with the borrower’s situation and qualification. With a thorough review of the borrower’s skills and sound business plan, the bank can look at the borrower’s current ratio to get a sense of their ability to repay.
Current ratio = Current Assets/Current Liabilities
Because the current assets can convert to cash, this ratio shares more of its information and its ability to pay its bills as they come due.
The bank will evaluate the loan request and extend the capital if they can get satisfactory answers.
- When will the borrower repay?
- Is the borrower’s character that such they will repay?
- If the borrower cannot repay, what marketable assets can I use as a trade? (collateral)
3. Commercial Paper
Today’s more mature and larger companies use commercial paper to finance their short-term requirements. Typically, they have a high credit rating and use it as a lower-cost alternative to short-term bank borrowing.
The way it works is it’s treated as short-term debt security to cover financial obligations. In other words, it is a short-term unsecured IOU that is sold in large dollar amounts by large corporations. Commercial paper usually reaches maturity between two to two hundred and seventy days.
Most commercial paper is commonly purchased by other corporations such as banks, financial institutions, or investors with temporary cash reserves at a discounted rate. It is a comfortable, safe way to obtain a return on cash that is sitting idle for them.
Commercial paper is not a usual means of funding for small business organizations.
Short-term funding remains a sensible way for companies to make a proper match between needed financing. This means of capital is determined by the assets and the associated form of financing available. No matter the size or type of the company, all must pass the acid test.