Once a business has been established it requires funds in order to meet up with the normal everyday expenses. Take, for instance, if the firm is a manufacturing firm, it will need to purchase the needed raw materials from time to time. In another scenario, workers who are involved in the production of goods and services for the business must also be paid their wages at regular—if not fixed—intervals. Other expenses relating to power and the likes will also incur by the business on a daily basis. In theory, a business is supposed to have a continuous supply of liquid cash with which it can meet all of these expenses. But that is not what obtains in practice. In most cases, businesses are unable to finance all of these expenses on their own, and often resort to short-term financing in the form of short-term small business loans in order to meet up. And as is often the case, when a business fails to obtain business funding it is forced to close down its operations.
Why do Businesses often need short-term financing?
Apart from short-term financing being used to finance such day to day expenses that have been listed, it serves other strategic purposes within a business. For instance, short-term financing helps a business to hold accurate stock of both raw materials and finished goods. If also a business has ready access to short-term small business loans, then it is possible for it to make sales to qualified customers on credit. The significance of this lies in the fact that when a credit sale is made, in practice a business cannot know when the debtor is to pay for sure, and if it happens that the sole source of working capital for the business stems from its cash flow, then the business could face serious difficulty if cash from debtors do not come in as at the time it is needed to fund other business operations like purchase of raw materials.
So when a business obtains short-term small business loans or any other form of short-term financing, it is able to carry out operations smoothly before it is able to collect its debts. Another scenario where short-term financing could play a vital role in the life of a business is when it needs to expand its volume of production in a short notice—possibly because it wishes to take advantage of a new market or a sudden hike in demand. In such a situation like this the business profits if it has ready access to short-term business finding. And most importantly a business needs short-term small business loans in order to have a steady flow of cash during its operating cycle; with the operation being the period of time from when production begins to when the business begins to make sales. Of course, there is no gainsaying the fact that a business needs funds it has to urgently purchase a new piece of equipment in order to replace a faulty one, or simply because it wants to make use of the latest machinery to optimize its production processes.
Some Merits of Short-term finance
Before taking a look at some of the various sources from which could obtain short-term funding such as short-term small business loans, there is need to examine what a business stands to gain from making use of short-term financing. In as much as short-term finance helps a business to meet its temporal but immediate need for money; it does not place such a heavy burden of interest on the business as obtains in long-term financing. Another area of short-term financing that appeals to the vast majority of business owners is its economy. For in most cases, short-term business finance can be arranged at a really short notice without having to involve additional raising cost. Short term small business loans which are provided to meet short-term financial needs are quite flexible. For instance, a business can obtain short-term finance as and when required as in the case of a business line of credit where the business is able to draw cash from the lender provided a certain specified limit is not exceeded. In addition, apart from the fact that the interest rates associated with short-term financing are often low in comparison with those associated with long-term financing, lenders who provide businesses with these short-term small business loans as the case may be done not get to be involved in the management of the business. This enables the business to retain its freedom in decision making. And as might be expected some short-term financing should go even go on to serve long-term purposes if it is such that can renew from time to time. An example of such is cash credit which can be extended by as much as 3 years with annual review.
Some Demerits of Traditional Sources of Short-Term Finance
In spite of the numerous advantages of short-term business financing which we have discussed, there are, however, certain aspects of short-term small business loans especially from traditional sources which a business might do well to consider before obtaining one. Just like all sources of business funding, short-term finance attracts a fixed burden in terms of interest payments no matter how small and regardless of whether or not the business is earning a profit or not. There is also the issue of the charge on assets. In general, short-term business finance is usually obtained with collateral security in the form of moveable assets. And until such loans are repaid, those same assets cannot be used as collateral for other loans; neither can they be sold to raise funds. It must be stated that in any case, that alternative sources of funding such as merchant cash advance which deserves a closer examination because of its popularity do not have collateral requirements, thereby circumventing this issue of fixed charge on assets. Also, if there is anything that can be regarded as the biggest challenge facing small businesses in the present time it is the fact that obtaining short-term small business loans from traditional sources is just plain difficult. The major reason for this is that small businesses are just unable to meet up with the rather bogus requirements, coupled with the general unwillingness on the part of commercial banks to take risks with small businesses since the recent case of an economic recession.
Popular Sources of Short-Term Business Loans
When speaking of short-term small business loans in general, attention is often shifted to actual cash. But that is not the only way in which a business could get funding as exemplified by the concept of trade credit. When a business obtains a trade credit from its supplier—whether it is of goods for resale or of raw materials—it is allowed not to make payments until after a certain period of time. If for example, the business obtains a trade credit of 90 days, then it does not pay for the goods which would be delivered to it until after 90 days. Although this form of funding does not provide direct cash to the business it does facilitates purchase without making payments. In addition to trade credit, small businesses also obtain short-term small business loans from banks. Banks also give overdrafts and bill discounts to small businesses, but those are very difficult to obtain. Small businesses have therefore turned to alternative sources of business funding in order to generate the much-needed capital for their businesses.
One such source is merchant cash advance which has come to be favored for a number of reasons. First, a merchant cash advance is unlike a loan as it does attract any form of interest. It is essentially a sale of future business receivables in exchange for a lump sum of cash. But because a given sum of money is more in the future, the business is required to make a discounted sale of its future receivables. It is through this discount that the merchant cash advance providers make a profit. One of the most exciting things about obtaining short-term small business loans from merchant cash advance providers is that the funds are delivered quickly—in a few days—without much hassle. In addition, there is no collateral requirement for obtaining a merchant cash advance, meaning that neither the business nor its owners assume any risk for obtaining the advance. Although a merchant cash advance provider cannot make claims when the business fails to repay the advance, it is often required that the business does not deliberately engage in acts that could deprive the merchant cash provider of his dues. Be that as it may, a merchant is not also required to have a good credit score before an advance can be received. This means that small businesses owners who would have otherwise not had access to commercial bank loans are able to do so because the requirements for MCA funding are not stringent.
Of course, there are other sources of short-term small business loans; there is hardly any other one that provides cash to a small business in dire need as quickly as merchant cash advance. Although it is relatively more expensive than most other sources of business funding, the fact that it is unsecured, coupled with the speed and ease with which business fund can be obtained makes it stand out as a leading source of finance for small businesses.