The terms “long term financing” and “short term financing” are probably familiar to you as a business owner. As their names imply, one describes long-term loans made under certain conditions, while the other describes (usually smaller) short term loans made under somewhat different loan conditions.
Here we’re going to focus on the latter and explain what a short term loan is, what it’s often used for by businesses, and how it can be important for your own business needs. Let’s dig in.
The difference between short and long term finance
Short term financing is where a borrower is obliged to pay back the loan in a relatively short time frame. Usually, this is defined as any loan period of less than a year, though this arrangement can be slightly flexible in either direction. For example, short term finance can have repayment terms that extend to as much as 18 months.
Other qualities that are common to short term loans include any of the following:
- Quick application processing and funding
- Easier qualification than long-term loans
- Lower capital outlay
- Much shorter repayment terms
- Typically smaller amounts (relative to long term finance)
- Typically higher interest rates
Short term loans vs long term financing
Short term financing can be used for business expenses such as unexpected cash flow needs, inventory purchasing, unexpected expenses, for minor hardware or equipment requirements, etc.
On the other hand, long term financing usually involves larger lump-sum amounts intended for major investments like entirely new lines of business equipment, real estate purchases or even buying an entire business, such as a competitor in your niche.
One important thing to note about many short term financing plans is that while they usually come with a slightly higher interest rate, their overall cost ends up being lower over the long term because your total outlay in interest payments is smaller in aggregate.
Why you should consider short term financing
One important thing to keep in mind about running a business is that sometimes, a quick infusion of short term financing cash can be enormously helpful for strategic investments in things that will help you sell more or grow.
Larger financial institutions like banks will often take too long to deliver. The red tape and conservative nature of commercial banks will sometimes lead to them refusing to lend to a small or medium-sized business, even it it is relatively healthy.
Alternative lenders like Lendified can be a much better choice. They know that paying out a smaller amount over a shorter period is not as risky as the banks think it is, which is why they will be more likely to approve your short term financing application.
After all, it’s usually less risky to expect enough business solvency within a year or less for repayment of a moderate loan than it is to bet on a company being able to pay back a larger loan across a decade or longer. Lendified offers competitive, quick and streamlined construction business loans, restaurant loans and others.
Better than the banks
You should consider short term financing for your business through a company like Lendified simply because you’re more likely to obtain it, and more likely to be approved for this type of financing without jumping through as many financial hoops. If you feel a strong, strategically beneficial need for the cash involved, then the loan is a good choice. Furthermore, these types of loans can often be processed in as little as 48 hours.
If you own a small business or one that’s growing but still relatively new, short term financing might be one of your only reasonable loan options for an emergency cash infusion, particularly if you have a good personal credit score.
Types of short term financing
While all short term financing is short term in nature, it does come in several different varieties. There are several types of small and large business line of credit funding models that can be considered sources of short term financing. These include:
Short-term small business loans
Small business loans with short term financing repayment terms are likely to come with a relatively low interest rate that’s more on par with that of a regular business loan. These short term loans often range in scope from 3 to 18 months and can have interests rates of between 5.5 and 10%, though this will vary depending on the unique needs of your business.
Business credit lines
These are some of the most easily available and flexible lines of short term financing you’re likely to find. They’re very similar to credit card limits in that you’re only going to repay what you spend from a certain maximum credit limit that you’re free to use or not. Your interest will be calculated off the credit you use instead of some total lump sum loan.
Invoice financing plans
Your pending invoices from customers or clients can also serve as a type of asset, because they represent an obligation for payment by someone else. This makes them collateral for short term loans called invoice financing plans, which let you secure and advance on pending invoices in exchange for a small percentage fee and a weekly interest rate for as long as an invoice goes unpaid.
With trade credit what you get is a very simple form of short term financing in which a vendor offers to a period of time before you need to pay for purchased inventory. Thus, you might get 28 days or a couple months to sell certain goods and then cover the trade credit amount owed for them.
The above are just a few examples of short term financing options. They’re often offered by both banks and alternative financing institutions. The main difference between these two sources is that a major financial institution or commercial bank is often more conservative about who it lends to, while alternative lending providers impose fewer barriers on short term loans, even if they charge a slightly higher loan interest rate.
How much short term financing can you get and how quickly?
The maximum amount of money that a short term financing loan involves can vary in the industry, but Lendified loans range from $5000 up to $150,000.
For example, Lendified offers loans in this exact range to business than include retailers, car dealerships, construction companies, restaurants and others. While Lendified does usually charge slightly higher interest rates than a large bank for its short term financing, its terms are much better than those of most merchant cash advance lenders. What’s more, Lendified can approve your loan application in as little as 48 hours after an online application process, and offer reasonable monthly payments.