If you have ever heard a headache-causing sound like your only computer crashing to the ground or your food truck crashing into a pole, then you know it is essential that you have money on hand to take care of unforeseen situations. Usually, this type of funding is just for the short term as it does not involve an extremely large amount of money that would be needed for things like large equipment purchases or build-outs or things of that nature. So, what are the options for short term funding?
- Credit cards – This is probably the easiest to obtain, and I would recommend as a must for any small business owner. I would recommend getting a business credit card that gives you points or cash back for purchases made. Use it to pay as many things as you can and earn as many points or as much cash back as possible. It also helps with cash flow as you only have to pay the credit card once a month. The interest rate on this option is most likely the highest, so it’s not the option to use to raise large amounts of capital. I would also recommend that you try to get a business credit card that does not report on your personal credit.
- Line of credit – This option usually requires a strong credit score, and so it is a little harder to obtain than a credit card. You will be able to draw down on the line of credit and get cash to pay for things that you couldn’t use the credit card for like payroll, so it’s definitely a good thing to have access to. Usually, you can access larger sums than a credit card, and the interest only accrues on the balance used. However, it is short-term financing, so you’ll typically only have a year or so to pay it back. Lines of credit are similar to credit cards in that, once you pay off what you borrowed, it is available again to draw down on. There are secured and unsecured lines of credit. Secured lines of credit usually allow you to borrow more at lower interest rates compared to unsecured ones. However, unsecured lines might be easier and faster to obtain since assets are not needed to get the credit approved.
- Receivables financing – This option works best for people who have large receivables balances that take a long time to pay. If you can’t wait the 30 – 120 days that it might take to get paid by clients, then you can sell your receivables and get your money upfront for a fee. In this arena are factoring companies which are used a lot by trucking companies. Things to watch out for with factoring companies are reserve requirements and recourse stipulations (meaning, if an invoice never gets paid by the customer, will the financing company come back to you to pay it?).
- Working Capital Loan – This option typically provides the largest amount of capital with the longest payback period, and therefore, payments on it might be more reasonable. It’s still not an extremely long payback, however, with the longest I have seen so far being 3-5 years. It should carry a lower interest rate than the line of credit, but unlike the line of credit, once you pay it off, you don’t have access to it again. Similar to lines of credit, however, some working capital loans require collateral.
Which type of short-term financing you will need will come down to the type of business you have and the needs you face. At the minimum, however, I recommend using a business credit card that will help build business credit and allow you to control cash flow better. There are several companies and banks that offer the various options. Approval can be dependent on the credit profile of the owner, the revenue generated by the business, the business type and history. Therefore, to determine where to go will have to be a customized consultation.