There may come a time when a business owner realizes they need cash sooner rather than later. But where they get these short-term loans matters because sources' interest rate and repayment terms will vary. Choosing a source for short-term loans can have a long-term effect on the company. For business owners who need cash a lot sooner than traditional loans can provide, think about looking into the following sources.
1. Trade Credit
This is probably one of cheapest places to get interest-free money. This is because when you buy a product or service from another company, they give you time to pay for it at no additional cost.
The longer amount of time your vendors give your company to pay their bills, the more cash that can be retained inside the company to fund other initiatives. Common terms are 30 days but consider asking for as long a term as possible (initially 45 days).
If you need more time to pay the bill, consider asking for it before the due date. This may give you an opportunity to get an extension while keeping the vendor's trust.
2. Family and Friends
While this may have personal drawbacks, getting short-term loans from this source can be inexpensive and informal. They usually carry interest rates of 3 percent or less and your family and friends may be more flexible about repayment terms.
Before getting short-term loans from this source, you may want to establish a loan rate and repayment plan. I recommend having this stated in a document signed by the lender and borrower to manage expectations. This can act as the first insurance against the loan harming a personal relationship.
3. Accounts Receivable Factoring
Receivables factoring turns customer invoices due into cash now. Your company gets paid by the accounts receivable factoring company—usually about 85 percent to 90 percent of the outstanding invoices—and then the customer pays that company. (Additional fees vary based on when the customer actually pays.)
I'd advise getting short-term loans this way if your company's receivables are growing rapidly and cash that can provide significant financial growth is needed. Companies like BlueVine and Fundbox are just a few of the many sources available for these types of loans.
4. Bank Overdraft
Many financial institutions provide an overdraft feature on a business operating account. This means that the company can draw more out of their cash account than they have. It then turns into a line of credit which needs to be paid off within a year.
This can be beneficial if the short-term loan is needed for approximately 30 days.
5. Charge and Credit Cards
Many business owners leverage their charge cards for satisfying a transaction and then pay off the balance before the due date with no interest. This in effect gives them a short-term loan of less than 30 days.
Other owners use credit cards to finance their business because the money is easily accessible. But it can be expensive with these rates topping 27 percent APR (Annual Percentage Rate). However, many financial institutions offer introductory or balance transfer rates, which can carry a lower interest rate for six months to a year. This can be an effective source for short-term loans.
6. Title Loans
This short-term loan is usually where you get money for handing over the title of your auto as collateral for 30 days or less. You must hold clear title to the car (no financial loans on it) and the lender usually puts a legal lien on that car.
These short-term loans are easy to get, but typically carry interest rates of 35 percent to 100 percent APR. If the short-term loan is not paid back in the stated period of time, the title lender gets the car. Companies like TitleMax and Advance America are two sources.
7. Refund Anticipation Loan (RAL)
This is a short-term loan secured by a taxpayer's expected tax refund. These are typically applied for through a paid professional tax preparation service. The Internal Revenue Service rules prohibit basing any fee on the refund, so costs can vary. Companies like H&R Block and Jackson-Hewitt currently offer this service.
8. Online Loan Brokers
There are quite a few online companies that offer short-term loans to small-business owners by connecting to lenders or providing the financing themselves. These need to be applied for like a bank loan since they ask for a credit score, company sales and profit. Rates can be 10 to 24 percent APR. Fundera and Kabbage are among the many online companies that provide this service.
There are platforms that allow you to post your short-term loan requirements for investors to bid at a specified rate to give your business cash. Rates can be as low as 7 percent APR. Companies like Prosper and Lending Tree are two sources for this service.
Whichever type of short-term loans you use, I advise you to do your research and choose wisely. Your choice can have a long-term effect on your company.
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