Once your firm is up and running, it’s time to start thinking about how to expand it in the future. You can serve more clients and hire more employees when you’re growing, which means your revenues and earnings will rise as well. Growth, on the other hand, necessitates monetary resources. Many business owners are unsure about when to make expansion investments and when to stick with the status quo because of this quandary. CitrusNorth offers short-term loans that can help your business acquire the financing it needs.
Short-term financing, like any other sort of credit, offers both advantages and downsides. As a business owner, knowing when to use short-term loans is essential. Let’s analyze when it makes money and sense to take a short-term loan to build your firm.
How to Benefit from Short-Term Loans: 5 Useful Situations
- Startup costs
As soon as feasible, many promising entrepreneurs fund their initial expenditures using short-term loans in order to gain provisional patent protection or meet pent-up demand in the market. Sometimes, a small amount of money can be enough to get a business up and running or make required operational modifications (e.g. larger processing power or storage space from Amazon Cloud Computing).
- Accounts Receivable and Payable Seasonal Gaps
Short-term loans can aid firms that are cyclical in nature, such as shops preparing for Black Friday, Small Business Saturday and other important shopping days. As an illustration, a florist’s monthly inventory may need to be increased by three times to fulfill the increased demand for Valentine’s Day. In order to take advantage of a supplier discount for paying in advance while you wait for your accounts receivable to clear, a short-term loan is necessary.
- Operational Costs in the Short-term.
Short-term financing can be useful if you need seasonal support or a specific piece of equipment to meet an abnormally high client order. Make sure to take into account tax credits for hiring disabled veterans during the holidays when calculating seasonal labor costs.
- Repairs that need to be done on short notice
Every now and then, things go awry. Having the money to cope with them is crucial for a quick return to normalcy and effective emergency response. If your computer server crashes or your packaging equipment breaks down, you can earn money to pay your expenditures.
- Another Class of Cash Flow Deficits
Cash flow gaps can occur in a variety of ways in different businesses. Short-term finance can help you get over a financial hurdle so that you can carry on with your business as usual even if you don’t have the money you need right now.
Short-Term Loans Cost-Benefit Analysis
Cash-strapped business owners must make difficult choices on how to handle their short-term liquidity problems. A short-term loan is a better option than using funds from other accounts, such as payroll, to pay for a major, unexpected purchase. As a result, a short-term loan is an option if you know that you’ll be able to get back on your feet fast following the financial setback as Torben A. Carlsen, a financial expert of CitrusNorth advises.
Most banks offer short-term lines of credit that allow borrowers to pay interest only, with a predetermined amount of time to pay off the debt. This can last anywhere from a few weeks to several years. Since the prime rate in the United States or the London Interbank Offered Rate determines interest rates for short-term loans, it is common for these loans to have variable interest rates (LIBOR).
Short-term loans, on the other hand, have a higher interest rate. You pay a higher interest rate on short-term loans because they must be returned more quickly than long-term loans. Financial experts advise against using short-term borrowing to fund long-term debts, such as the purchasing of fixed assets such as automobiles, equipment, real estate, and acquisitions of other firms and their assets.
Buying long-term assets using money from short-term loans is just as risky. A fundamental corporate finance rule is to assess how long an asset can be expected to last and how long a loan can be expected to last.
Additionally, short-term loans aren’t ideal if you’re looking to make a risky company buy. As an alternative to relying just on an informal dialogue, you might secure the transaction by getting a letter of intent. Helps you get a better deal from your lender, safeguards the interests of your customer, and stops them from negotiating with anyone else.
A short-term loan repayment strategy must include fail-safe options. There are a number of ways this could be interpreted:
Setting aside enough money to cover the loan payments even if the predicted gains in revenue do not occur.
To meet your financing charges, you’ll need to find last-resort customers such as suppliers that buy back leftover inventory.
Obtaining an SBA Loan for a Limited Time Period
While short-term financing options such as personal lines of credit, home equity loans, and asset-based loans exist, many businesses seek short-term loans from the Small Business Administration of the United States (SBA).
To assist small businesses develop, the SBA works with lenders to acquire loans. The loan and credit requirements of every institution are different. Even though the loan is backed by the government, you still need solid company credit.
The SBA’s microloan program is one of the most popular short-term loan options. As of this writing, the maximum loan amount offered by this program is $50,000, with an average loan amount of $13,000. Inventory, equipment, working capital, and furniture or fittings can all be obtained through microloans.
Repayment terms for SBA loans are dependent on a wide range of variables, including the loan size, the borrower’s needs, and the lender’s regulations. A normal range of interest rates is between 8% and 13%. An SBA microloan has a maximum repayment term of six years.
Before a loan application can be evaluated, some training and preparation requirements must be met. If you’re planning on starting or expanding a business, this will help you get the information you need. Get in touch with your local SBA district office to find out more about microloan intermediary lenders participating in the program.
Alternatives to Short-Term Financing
Lines of credit, home equity loans, and SBA loans all necessitate bank involvement. Some small business owners, on the other hand, have less-than-stellar credit histories. As an example, it can be difficult to quantify online transactions in a way that traditional lenders can understand. Fortunately, there are alternatives to short-term loans available.
Platform lenders like Kabbage can provide funding to small businesses, seasonal firms, and other types of businesses that do not fit standard bank regulations. If you’re looking for a working capital loan of up to $100,000, platform lenders like Kabbage don’t just look at your credit score; they look at a wide range of company data, including data from Square, PayPal, and Etsy.
Kabbage may be a suitable alternative for short-term loans for firms that are just beginning to build or re-establish their credit history. You may be able to get the money you need to grow your business in as little as seven minutes.
The Facts on Short-Term Loans
Short-term loans can come in handy when you’re coping with a short-term financial problem or a sudden boost in business. If you’re looking for a short-term business loan, consider CitrusNorth short-term loans as part of a wider range of financing choices. When traditional bank financing isn’t an option, platform lenders may be able to provide the capital your company needs to expand.