MARKET INSIGHTS | FAST CASH
7 Short Term Loan Options
PUBLISHED June 2nd, 2020 BY ALAN STEIN
Structured term loans are available through the traditional banking network, however, the threshold for bank approval can be challenging with high FICO scores, strict paper trail documentation, and a time-consuming due diligence process that may not be practical if you need a business loan quickly.
An easier way for most businesses to get quick cash is to get a short-term loan (term of less than one year). These loans are usually provided by an “alternative lender”, utilizing a simplified application, which can be funded within 72 hours. An alternative lender will most likely have a flat fee, an interest rate charge, and an accelerated repayment schedule, which will result in a higher cost of capital when compared to the fees and interest rate charges from a bank.
Here are the 7 most common sources of short-term business loans:
1) Merchant Cash Advance (MCA)
This is one of the more expensive loan options. Merchant cash advances are legal because they are not considered loans. Instead, they involve the purchase and sale of future income. MCA’s feature simplified applications and qualifications. Your loan can be advanced within 48 hours. MCA’s and short-term loans utilize a flat fee approach, where the amount you owe is the amount you “borrowed” plus a percentage of that amount, known as the factor rate. The MCA company will retain a percentage of your daily credit card income, directly from the processor, until they have collected the lump sum, they gave you, plus their factor rate fee. MCA’s don’t have exact term lengths, but the higher your credit/debit sales, the more quickly you will pay the debt off.
2) Alternative Lender Loans
Alternative lenders deal in short-term loans, merchant cash advances, and loans resembling traditional installment loans. Short term loans provide a fixed lump sum of money up front that can be repaid in monthly installments over a set period of time and may come with early pay-off provisions. The alternative lender cost of capital is higher than what a traditional bank would charge.
3) Business Credit Cards
Business credit cards can be a convenient way to pay for emergency expenses, however, an outstanding balance that sits on your card for a number of months will quickly become more expensive than a loan itself. On the other hand, if you’re able to pay your business credit card off in full, within your grace period, you won’t owe any interest at all. Taking out a cash advance with your credit card is also an option, but the fees and interest rates on those transactions make the cost of capital very expensive.
4) Line of Credit (LOC)
Banks and some alternative lenders offer revolving and non-revolving business lines of credit (LOC). In a revolving LOC you can draw cash in any increments up to your credit limit. You only make payments and owe interest on the amount of credit you’re using. As you pay off your balance, that credit becomes available to use again. A non-revolving LOC works the same way, except that once you use your credit line, it does not become available again after you pay it off. In order to maintain your credit line, some lenders charge a fee each time you draw on your credit line, while others impose monthly or annual fees.
5) Invoice Factoring
A company, with an unpaid invoice in hand, can sell or assign its accounts receivable to a factor. The factoring company will advance a discounted portion of the unpaid invoice and take over collections. Once the full invoice amount is paid, the lender will pay the difference to you, keeping an agreed percentage for their service. Make sure, though, that you’re okay with someone else dealing with your customers before deciding to take this route.
6) Invoice Financing
The lending company will advance you a certain amount, as a loan or line of credit, based upon the value of your receivables. Once your customers pay their invoice, you’ll pay back your loan plus fees and interest. You are responsible for collecting outstanding bills owed by your clients.
7) Purchase Order Financing
This short-term finance option provides or guarantees capital to pay suppliers for verified purchase orders. The supplier delivers the goods to the customer, and the PO finance company pays the supplier directly. The customer pays the PO finance company the retail value of the order from which the PO finance company will then deduct their fees and pay you the remaining amount. PO finance companies make money by charging you a percentage of the amount that they advance to the supplier.
The fast cash options described above are among the most common short-term loans used by business owners. We suggest taking the time to further research these options in order to determine which best suit your current situation and business needs.
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