Financing Debt to Meet Your Short-Term Working Capital Needs
When it comes to small business finance, both debt and equity financing have a place. If you are just getting started, you may have difficulty with debt financing, since loans are typically involved. Start-ups usually are dependent on the savings of the owner or loans from friends/family. Once the business has been operating for a year or more, the need for loans or other short-term financing comes up. Typically, short-term loans are needed for working capital.
In addition to working capital loans, there are other short-term debt financings available for small businesses.
Debt Financing Explained
Debt financing is defined as money borrowed by a business owner as working capital to operate the business. This occurs when the business owner seeks financing from a lender or creditor. It’s a broad category of small business financing. Equity financing is something different. Debt financing can be a short-term loan from a local bank to a local, small business or it can be a long-term bond issued in millions of dollars for a large corporation.
Types of Short-Term Business Financing
There are several types of short-term business financing available:
• Trade Credit
• Short-term Loan
• Business Line of Credit
• Merchant Cash Advance
What is a Short-Term Business Loan?
In some cases, a small business needs a short-term loan instead of long-term debt financing. Most of the time, they prefer a short-term loan over merchant cash advances or factoring because the interest rates are usually lower, and terms are more favorable with a short-term loan. Plus, a short-term business loan is usually easier to get than a business line of credit.
Most short-term loans have a maturity of 1 year or less. Many times, they must be repaid quicker than that- within 90 to 120 days. Sometimes, these loans require collateral, especially if you’ve been in business less than 1 year or you have bad credit.
How Does Short-Term Financing Help with Working Capital?
Short-term financing can be a major help with working capital. For example, many times, if a business is seasonal, short-term financing can be used to purchase inventory. Other uses involve covering payroll and other expenses when you have deficiencies in your funding. You may need cash to pay your bills while you’re waiting on your customers to pay theirs. You may just need help to balance cash flow, especially if your business is cyclical.
Qualifying for Short-Term Financing
When you are applying for short-term financing for your working capital needs, you must present documentation to your lender. They will want to see a record of your payment history for other loans you may have had, including payment history to your suppliers and your cash flow history for the previous 3 to 5 years. You will also likely be asked for your income statement for that same period.
The lender is also going to check your credit history and credit score through at least one of the credit bureaus. There may be a minimum that you must meet- this varies based on the lender. These qualifications will determine whether the loan is secured or unsecured, a signature loan, or a line of credit.
Do you need help securing financing for your working capital needs? If your answer is yes, contact Toluca Lake Capital. We can help you navigate through this process of getting the financing you need.