You need to find a solution for financing your small business. A momentary sense of panic hits. Whether it’s for a growth opportunity or a short-term cash infusion to cover expenses, it’s normal to feel overwhelmed or anxious as you approach the borrowing process.
Navigating the lending landscape can be daunting — but it doesn’t have to be this way. With a basic understanding — starting with the difference between short-term vs long-term business financing — you can move forward with greater confidence.
Short-term vs long-term business financing
As their names imply, the primary difference between short-term and long-term business financing is how long you have to pay back the loan. Typically, long-term lending options are paid back over a number of years, while short-term lending options are paid back over a period of months or as little as two years.
Your choice of short-term vs long-term financing will also be determined by:
- The amount you need to borrow.
- How quickly you need the funds.
- The type of lender you’ll borrow from.
- The type of collateral you’ll provide.
- Your business’ overall financial health.
Short-term vs long-term business financing amounts
Short-term business financing options are for smaller amounts while long-term financing options are for larger amounts. Because short-term financing is for smaller amounts, you pay them back more quickly at a higher interest rate and there’s a shorter approval process. As long-term business financing options are for larger amounts, there’s a longer, more rigorous approval process and it takes more time to pay them back. However, the interest rate is lower than with a short-term loan.
The figures vary, but a rough estimate is that short-term lending amounts are less than $250,000. Long-term lending amounts are in the $500,000 range.
Short-term vs long-term business financing sources
As you’d expect, brick-and-mortar banks are the most common source for long-term business financing. If you’re looking for a traditional short-term “term loan” where you complete a detailed application, including documentation to prove that you repay that amount, you can also go through a large or small bank. (Think sitting across from someone in a business suit.)
However, the market for short-term financial lending has grown rapidly. As a result, businesses can choose from a range of short-term lending options. Again, this doesn’t exclude banks. It simply expands your range of options to include online lenders, with quick approval times and other short-term financing options you may not be aware of. (Plus, no business suits.)
According to a recent study, from 2015 to 2017 the amount of small business online lending activity increased 50% — representing $10 billion in financing. The same study found that approximately 42 % of small businesses borrowed between $10,000 and $50,000 with the average being $55,498.
Traditional short-term business financing options
If you’re not sure you want a traditional term loan, you can also look into a business line of credit as a short-term financing option. A line of credit is different than a loan as it sets up a pre-determined amount that you can draw from whenever you need. A business credit card is also another more traditional short-term business financing option.
Because loans, lines of credit and credit cards are the road more traveled, they also require a more in-depth application process and proof of a stable payment and financial history. In other words, your business has to have a solid credit history and financial track record.
Your payment history for loans, lines of credit and credit cards will also be recorded in your credit history. As will any applications for these forms of financing.
Not-so-traditional short-term business financing options
While invoice factoring and invoice financing have both been around since the first bazaars opened in ancient Mesopotamia, many businesses owners don’t even know these options exist.
Invoice factoring and financing let businesses who have incoming cash flow tied up in outstanding invoices use these invoices to access short-term funding quickly and easily. While banks don’t offer this type of asset-based financing, online lenders do. In fact, this type of lending is now a multi-trillion-dollar industry.
Similar to invoice-based lending, there are similarly structured short-term financing options that let businesses use their inventory or retail sales as collateral. (A little research can take you a long way in identifying your options.)
Benefits of online short-term business financing
With online financing, such as invoice factoring, businesses don’t have to go through a lengthy application process as they would with a traditional lender. The primary criteria are the invoice, the customer’s payment history and the business’ risk profile.
As a result, the approval process is much quicker and once the business has established a relationship with the lender, the turnaround times can be even faster.
Online lenders and asset-based financing
Online lenders are also more familiar with small businesses. They understand that there are ups and downs with a business’ cash flow and are more willing to work with newer businesses and businesses experiencing cash flow crisis.
Unlike traditional loans, lines of credit and credit cards, when you use asset-based lending, there’s no impact on your business credit history. Online lenders don’t use the traditional credit rating bureaus, nor do they report to them. The relationship you form is with your lender only.
A short-term vs long-term business financing must-know:
How technology can help you manage your cash flow
At PayPie we’re laying the groundwork to bring small to medium-sized enterprises (SMEs) access to affordable funding. First, we’ve developed insightful tools like our free cash flow forecasting that includes a proprietary risk score.
Each report gives a business insights and analysis into how its cash is flowing in and out of their business. In turn, the risk score is an assessment of how other businesses and lenders view your business in terms of establishing financial relationships.
This service is available — free of charge – for any QuickBooks Online user. All you have to do is create a PayPie account, connect your QBO account and run your report. (Integrations with other accounting applications are coming soon.)
We’re working with regulatory authorities to ensure that our invoice factoring will meet all legal and business standards. To find out when this service will be available, register here.
This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.
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