Scaling a business is difficult. Investors want equity in your business, cut away at your profits, and eventually become an obstacle for long term success. In order to maintain the mobility of your company, while being able to efficiently expand – you may want to consider Short Term Financing.
What is short term financing?
Short term financing options are traditionally paid off within a year, with the longest terms lasting up to 18 months. The majority of businesses use this type of financing or “working capital” for the money they need for their daily expenses when providing services or products. Deficiencies in upfront capital will often result with reduced cash flow and lower revenue in a fiscal quarter. Therefore, time sensitive expenditures are the primary niche for short term funding.
How can I use short term financing?
The most effective way to benefit your business with short term financing is using working capital to generate larger sums of revenue. These funnels are typically categorized into the addition of material or payroll. Whether you are in the construction, restaurant, or technological industry, here are primary examples of where to invest when you receive short term funds:
- Expansion
- Advertising
- Additional staff
- Increasing Inventory and Equipment
*Sectors who experience seasonal fluctuations are able to benefit most from Short Term Financing. With operating costs skyrocketing in a particular season, companies may need to hire additional employees or increase manufacturing to meet demand. With lack of resources and a reduced efficiency they will be unable to maximize revenue for their business.
What are the advantages and disadvantages of short term financing?
Pros
The main quality that makes short term funds desirable are that they are quickly accessible forms of capital that are typically easier to acquire than traditional financing options from banks. As the name implies, the commitment for these funds are short, and therefore unrestricting for the long-term objectives of your business. It is much cleaner and straightforward than “traditional”, longer term funding options that would chip away at your gross revenue for years.
Cons
With a shorter period of time, the amount to be paid back can be a hassle – if you do not generate enough revenue with the funds. This can cut into your cash flow and become a burden for the company. With an unreliable business model, it is better to hold off from acquiring short term funding.
*Keep in mind that the shorter period will mean that rates for short term financing are fixed and will not accrue compounded interest like old fashioned debt payments.
Our Verdict:
When looking at short term funds at an analytical standpoint in conjunction with a healthy business model, having access to additional capital can only benefit a company for expediting long term success. Short term financing is a great option for companies with adequate business health, or those who are looking to supplement their business.
Characteristics of a company with notable business health would ideally have:
- High ROI: Properly managed businesses will be able to keep their expenses relatively flat, making sure that expenses move linearly with increasing revenue. Optimizing price points to balance volume and marginal revenue should be set for a healthy business.
- Strong Cash & Asset Balances: These are good indicators of business sustainability. A company with strong cash & asset balances are able to meet unexpected expenses and are set for long term success.
- Low Debt Ratios: The amount your business is worth in comparison to the amount your business owes in startup and operational costs.
- Growing Customer Base: Maintaining customers and having repeat customers is important. However, profitable companies are able to steadily bring in more consumers for their catalog of products and services.
If these are characteristics that fit your business, then short term financing may be a viable option to increase your profit margins.