Jun 15, 2015 Philip Burgess
Reminder - "short term" and "long term" Don't forget to change the picture caption
Small business owners often find themselves in a position where they need immediate cash flow to fund a new venture, but they do not want to undertake large, long term loans from a bank or other lender. Fortunately for them, other options exist. Short term loans are for a year or less, and they offer financial flexibility for companies that need it immediately.
There are various scenarios in which a small business might need a short term loan. Here are some of the more common examples of when - and how - they are used.
1. Daily business operations
The Houston Chronicle stated that for newer companies, or those that have seen a slight dip in profits but aim to reverse the trend, sometimes it is necessary to take on short term loans in order to simply keep the business running. Startups need funding to grow and establish themselves, but it is not ideal to take on a long term loan that will hinder them for years to come. In these instances, the most viable solution for such organizations is to focus on the immediate future and apply for a short term loan. By gaining more spending capital, completing daily business operations can become more feasible and growth can be more achievable as a result of this financial flexibility.
2. Cash flow
Many small businesses rely on expected income to remain viable, according to Kabbage. But sometimes payments are not made on time, can be delayed or just take a while to process. This means that companies that depend on future payments can be handcuffed by the deficit in accounts receivable, which makes it hard to operate smoothly. By obtaining a short term loan, small businesses can create some financial breathing room and allow for potential growth. The source said that sometimes companies just need some extra spending capital to get over the hump while waiting for impending revenue to come through, and short term loans can offer this service.
3. Emergency situations
Another situation in which short term loans may be necessary is an emergency, both sources agreed. The Houston Chronicle noted that business owners cannot predict the future, and that sometimes unexpected things happen - a flood, a fire, identity theft, robbery, etc. The source added that while most companies have insurance and reserve cash funds for such circumstances, these backups might not cover all of the emergency-related expenses.
Fortunately, Kabbage said, there is no need to eliminate spending in other areas just to compensate for an emergency. Instead of being forced to cut payroll or other large expenditures to make up for the damages your company has sustained, the source assured that short term loans can offer temporary stability in these circumstances. With additional funding, you can right the ship and reinstate ordinary business operations in a timely manner, which can save your company both money and hassles down the road.
4. New business ventures
Most small businesses have lofty aspirations and continually aim to expand, the Houston Chronicle said. But often, in order to open a supplemental location, add more employees or tap into a new market, outside funding is required. Daily revenue alone might not cover all of the expenses of expansion, and so, the source said, a short term loan can be a great asset. The idea behind business growth, obviously, is that you will soon see increased profits and will be more easily able to pay off such loans and continue to move up within your industry. Temporary funding can provide both a safety net and a vital means of investing in the tools and resources you will need in order to achieve expansion.