You’ve hit on a brilliant business idea, and can’t wait to start building it into The Next Big Thing. But there is one problem…
You’re going to need $$$. And based on your calculations, you might not have enough savings on hand to get your business going.
Well, don’t give up just yet—because you may just be able to leverage short-term finance to make your business idea a reality!
In this guide, you’ll learn what short-term finance is, why to consider taking it up and how to get short-term finance for your business.
What is short-term finance?
Short-term finance refers to obtaining money to pay for business expenses in the short term (usually less than a year). This can be handy if you’re working on your new business idea but don’t have enough cash to do so.
An example could be when your business needs to make certain one-off payments. However, you might not have enough cash to comfortably make these payments and fulfil your other payment obligations, such as the payment of rent and salaries.
In this situation, getting short-term finance might just provide your business with a financial lifeline.
Long-term finance is more suitable for buying major assets such as property, where the business has to fork out larger sums of money for the purchase—and may therefore need more time to pay off the loan.
What short-term financing options are there?
There are many short-term financing options available. Let’s look at three of them in detail:
1. Getting a short-term loan from a bank
This option might be what immediately comes to mind if you’re looking for an injection of cash into your business. You approach a bank for a short-term loan, which you’ll repay in instalments with interest.
Example: you take out a short-term loan of $20,000 from ABC Bank, to be repaid within one year.
When reviewing your loan application, the bank may impose certain eligibility criteria such as your business having a certain percentage of local shareholding, and your annual turnover not exceeding a certain amount.
2. Applying for an overdraft facility
In this situation, you’re also borrowing money from the bank. The difference is you’re allowed to borrow any sum up to an amount of credit fixed by the bank, whenever you want.
You will of course have to repay the amounts borrowed with interest. But after you do so, you will then be able to borrow up to the full credit amount again.
Example: you obtain an overdraft facility of $100,000 from ABC Bank. Two weeks later, you borrow $20,000 from the bank, leaving $80,000 in your overdraft facility.
You can repay this $20,000 at any time, although interest will accrue for the duration that the loan is not repaid. You will also be able to borrow up to another $80,000 from ABC Bank for the time being. But after you repay the $20,000, you will be able to borrow up to $100,000 again.
3. Obtaining trade credit
If you obtain trade credit, this means that you’re buying goods or services from other businesses (or suppliers) and being allowed to make payment for these only later.
For example, you may be required to make payment within 30, 60 or even 90 days of purchase and more, instead of immediately. By doing so, you free up funds for spending on pressing needs that have to be paid for sooner.
Example: You buy $100,000 worth of widgets from XYZ Supplier, to be paid within 60 days of the invoice. On day 20, you spend $50,000 on staff salaries, which you’re able to pay off using the $100,000 that you haven’t paid to XYZ Supplier (yet).
By day 45, you’ve made an extra $300,000 in revenue. Then when it comes to day 60 of the invoice, you use your newly earned revenue to make full payment of $100,000 to XYZ Supplier.
If you’re looking at obtaining trade credit, then obviously you’ll want to get credit terms that are as long as possible. But this will be subject to what the supplier is willing to bear, however.
After all, not every supplier might appreciate being treated as a “bank” that offers “interest-free loans”!
Which short-term financing option is best for your business?
To decide on the best short-term financing option for your business, consider factors such as:
- Your business needs
- Comfort level in taking loans
- Financial ability to repay the loans with interest
Do you know exactly how much you want to borrow to fund your business idea? If so, perhaps you can get a short-term loan for just that amount—with no extra fuss.
On the other hand, perhaps you know roughly how much you need at this time, but want to have a more flexible line of credit that you can tap on whenever needed. In this case, applying for an overdraft facility might be more appropriate.
If you don’t like the idea of taking loans and being beholden to banks, look into obtaining trade credit instead. But bear in mind that getting such trade credit will involve making purchases with suppliers with money you may not currently have.
As a result, you should be generally confident of your ability to pay off your suppliers when the invoice becomes due.
When it comes to funding a business idea, being able to stump up all the required cash—without taking any loans—might be ideal. But not every new entrepreneur is in such a position to do so, and that’s okay.
Tap on the various short-term financing options to get your business rolling in the meantime. This way, you can focus on developing your business idea instead of finding ways of funding it. Just don’t forget to pay your debts as they fall due!
Editor’s note: Got questions about putting your idea online? Get instant answers on GoDaddy Asia Facebook Messenger now.