There is a reason why the old phrase “you have to spend money to make money” is so common because access to capital is the blood of the life of any business and, in particular, of small businesses.
This concept is never more obvious than when a company is about to generate an income generation opportunity, but it can not make it work because it has no funds. Monitoring the disappearance of guaranteed profits is a helpless feeling.
But for companies that need money to complete inventory, expansion, operating expenses or start-up costs, there is an option: to take a short-term debt in exchange for funding. The pattern of short-term business loans over the past few years shows an extraordinary increase: short-term non-bank lenders have doubled the amount of money they borrowed from $ 1.5 billion to $ 3 billion over the period 2012-2013.
This alternative lending pattern helps meet the needs of a serviced group, especially after the credit standards that emerged since the 2008 financial crisis, forced many small businesses to leave the lending market. According to the Wall Street Journal, the cost of all small unpaid commercial loans (up to $ 1 million) in federal insurance banks declined by 15% between 2007 and 2013.
To get a loan in a large bank, small businesses must have a credit rating for iron, submit tax returns, business plans and other documents and then wait for a decision within a few weeks. Finally, large banks grant loans to only 18% of applicants, while non-bank lenders approve 49% of applicants.
Short-term loans are not a suitable solution for any situation, as the interest rates on these loans are much higher than most traditional options. But for companies looking for a super fast credit contract with poor credit and documentation requirements, taking short-term debt may be the best option.
When short-term debt makes sense
There are certain situations where obtaining a short-term loan can be the best step.
Scenario 1
Your business has the opportunity to generate revenue, but it does not have the capital to make it. This can be a big waiting queue for a buyer you can not do right now, seasonal holiday sales or the equipment or inventory you need to buy for a start.
Because these revenues depend on the provision of additional capital, switching to short-term debt makes sense. As soon as you receive additional income, you will be able to pay your short-term debt, which will allow the company to obtain a quick, low-risk profit.
Scenario 2
The nature of the business is important when considering the short-term debt. Businesses receiving daily incomes are highly suited to this lending model, as most short-term loans are automatically reimbursed through daily ACH operations.
Although this payment program works well for businesses that earn a steady income, for businesses that depend on more than one weekly or monthly payment, it may be more difficult to deal with daily payments. Generally, short-term debt should be limited to assets that can generate revenue quickly, such as stocks, while long-term loans should be for long-term assets, such as property.
Scenario 3
It is also important to understand that short-term loans are not usually amortized as ordinary loans. As a result, it is often difficult to determine whether you pay interest or a principal amount. If you want to repay the loan ahead of schedule, short-term creditors usually offer a fixed reduction on the balance. A small number of short-term creditors that amortize can forgive any remaining interest or allow businesses to pay a percentage of that share. Conditions vary among creditors, so it is important to carefully consider the terms of your early pay before entering into an agreement.
The benefits of short-term loans
If you are in a situation where a short-term loan may make sense, here are some of the main reasons for considering evolution.
Availability
Short-term lenders have more relaxed qualification requirements than ordinary bank loans or SBA. This allows borrowers with access to loans to damage the necessary capital resources. For closed enterprises in the traditional lending market, short-term debt is often a lifeline.
Speed
Enterprises with urgent capital requirements can usually provide short-term loans within a few hours, not days. This contrasts sharply with many ordinary lenders, who often have to do business for weeks or months.
Limited time
Short-term loans, by definition, have a limited duration, usually from 3 to 18 months. This means that your short-term debts are quickly released from your books, which is always encouraging.
Easy to claim
Requirements for documentation are much more common; often these are just a few months of bank statements. Busy businessmen or those who have gone through the difficult process of securing traditional bank financing will appreciate this difference. By providing capital through a simplified process that requires a minimum amount of documentation, business owners can focus on day-to-day operations, rather than burdening with the details of funding.
Is a short-term debt right for me?
Not two situations are exactly the same, so every business owner must answer this question himself. Considering that about 50% of enterprises do not survive more than five years, it is obvious that every small business owner should weigh the pros and cons of receiving a loan.
You should also keep in mind the following five key business forecast indicators:
- Your money / asset ratio is low
- EBITDA on assets is low (EBITDA = earnings before interest, taxes, depreciation and amortization)
- Your long-term debt EBITDA is low
- The share of debt to assets is high
- Your net income to sales ratio means low profits.
But there are several criteria you can use to determine if a short-term loan is a reasonable choice.
If you are in a situation where the failure of a new capital will cost your company a guaranteed income, a short-term loan is almost always a good choice. Money can be paid quickly, without risk. Using a short-term loan to refinance other short-term debt at a better rate is also a sensible step.
On the other hand, obtaining a short-term loan to fulfill its long-term obligations (the old scripture “rob Peter to pay Paul”) is less susceptible. In general, short-term loans are most suitable for situations where they can be directly linked to income.
However, it is important to always compare the range of loan offers to determine the option that best suits your loan needs.