What is Short-Term Financing (+ 6 Options to Consider)
When life starts to hit us with responsibilities, we soon come to understand the value of every penny we make. There are even instances where you might find you don’t have enough to cover your expenses.
Taking out a loan can be a good way to come up with money when you need it fast. Whether for personal reasons or a business venture, short-term financing is often a good option.
But what exactly is it? Here’s what you need to know about short-term financing and what to consider when applying for it.
Short Term Financing Defined
Short-term financing is paid off over a shorter period than other types of financing. Typically, the borrower will need to pay it off within a year.
These types of loans can be easier to qualify for and can be obtained faster than other options. Most short-term financing requires daily or weekly repayments rather than the monthly repayments of long-term financing.
What It’s Used For
A common reason to seek short-term financing is for a small business. You might need funds for launching your business, covering inventory costs, offsetting inconsistent cash flow, or paying employees.
Alternatively, if you’re applying for a personal loan, it might be for a variety of reasons, including medical emergencies, vehicle repairs, home renovations, weddings, vacations, or relocations.
Types of Short-Term Financing
There are several different types of short-term financing. They include the following:
Short-Term Loans
A short-term loan operates similarly to traditional loans in that you receive a single payment that is then paid off with interest over time.
The funds can usually be accessed within a day, but this method tends to require a credit score of at least 600 to qualify. If you’re in need of quick financial assistance, same day loans can be a viable solution.
Merchant Cash Advances
These are given as a lump sum and repaid directly in one or more installments. They are primarily offered by online financing companies.
Of all the different ways to access quick cash, merchant cash advances are one of the fastest and easiest. You can be approved even if you have a low credit score or have only been in business for a short time.
Credit Lines for Business
A credit line for your business works a lot like credit cards. You’ll have access to a predetermined amount of credit, and you’ll pay back what you spend plus interest.
Once you pay back what you owe, your line of credit will reset. The benefit of this type of loan, as opposed to a credit card, is that credit lines often have lower interest rates.
Invoice Financing
If you have a B2B company that sends out invoices to customers, invoice financing is a good option to keep your business from suffering while waiting for outstanding payments.
You will get between 50% and 90% of the amount due, and once your customers pay their outstanding invoices, you will get the remaining money back minus the interest owed.
Pawn Shop Loans
This type of loan involves bringing an item into a pawn shop in an attempt to use it as collateral.
A pawnbroker will assess the item and determine its approximate value, and if they decide to offer a loan, it will be for a portion of the total value.
You’re given a pawn ticket and a period, typically 30 days, during which you can return to pay off the loan to get the item back. If you fail to do so, the pawnshop can sell the item to recoup its losses.
Payday Loans
A payday loan will advance your money until your next paycheck, at which point you’ll have to pay it back. These don’t require a good credit score and are easy to apply for.
However, if you can’t repay the loan after receiving your next paycheck, it will roll over and can lead to more debt from interest and fees.
Why Choose Short-Term Financing
There are other financing options you can consider, but short-term financing can be a great option if you want funds immediately without having to spend years, possibly even decades, paying off debt.
Long-term financing is usually appropriate for things like purchasing buildings and equipment for businesses, college loans, and home mortgages, but you can look to short-term financing for most other personal and professional needs.
Short-term financing also has lower interest rates than other options, with some exceptions such as pawnshop loans. It’s important to understand what kind of interest and fees are part of the financing you choose, as this can significantly affect their viability for your particular needs.
Pros and Cons of Short-Term Financing
It’s essential to consider both the benefits and drawbacks of short term financing:
Pros
- Get Cash Quick: You can get the money fast so you can start using it immediately.
- Easy To Qualify For: You can often qualify even with a low credit score or a small amount of collateral.
- Less Accumulated Debt: Because of the short period in which you repay them, you won’t accrue large amounts of debt, so long as you make your payments on time.
Cons
- Faster Repayment Schedule: You will usually have to make payments daily or weekly, which can be difficult if you don’t have regular cash flow.
- Higher Repayment Amounts: Because you pay them back within about a year, the amounts of each payment will be higher than with long-term options.
- Can Be Expensive: Between the faster repayment schedule and higher amounts due, short-term financing can become expensive. If you are struggling to make your payments, you can end up in a significant amount of debt.
Short-term financing can be a good solution for your personal or business needs, but you must keep in mind exactly what’s involved with the type of financing you choose.
These types of loans are more accessible than long-term options and have a wide variety of uses, but you must keep in mind the negatives as well as the positives. Now that you have a better understanding of short-term financing, you can decide if it’s the right option for you.
