Tuesday, March 3, 2020

5 Types of Short-Term Finance for Businesses

Is your business strapped for cash? There are five main types of short-term financing that you can consider, they include:

Trade Credit

We'll talk about trade credit. Trade credit is when you buy goods or services and pay for them later. So, let's say you own a mobile accessories shop. You buy a bunch of phone covers at one time, and then you pay for them later. Every time you use trade credit, you get an invoice that states the terms, and it might look something like this:
2/10 net 60 
The above means that if you pay within the first 10 days, you'll get a 2% discount and you need to pay back the full amount within 60 days. This is one of the most common types of short term funding for businesses because it's the least expensive and most convenient. If a business doesn't have good credit or if they just don't have a credit history. The trade-credit supplier might require a promissory note. A promissory note is a written contract with the promise to pay the supplier a specific sum of money at a definite time. 

Family and Friends

Next, we have friends and family. Sometimes businesses will go to friends and family to obtain financing. This is really not recommended, however, because it can create problems with relationships. If you decide to do this, it's very important to agree to specific loan terms to put the agreement in writing and to arrange for repayment the same way that you would do for a bank loan.

Commercial Banks and Non-Bank Short-Term Financiers

Next, we have commercial banks and non-bank short term loans. In this category, there are:
  • Secured loans
  • Unsecured loans
  • Lines of credit
  • Revolving credit agreements. 
If you're not able to get a loan from a bank, you can always try a short-term non-bank lender. These organizations typically offer loans with a repayment period of fewer than 12 months and at a higher interest than commercial banks. They are usually willing to lend to businesses with a low CRB score and are often a lender of last resort for many businesses in Kenya. Despite the higher interest, they will usually disburse the funds much faster than a conventional bank and have fewer requirements. 
A secured loan simply means that it's backed by collateral/security such as a vehicle logbook, title deed provided by the borrower or guarantor. If the borrower doesn't pay the loan off, then the lender can take possession of the collateral. An unsecured loan is more difficult to get because it doesn't require collateral, and usually, you can only get on an unsecured loan if you have really good credit history and oftentimes a good relationship with your bank from prior loans. Next, there's a line of credit where a firm is given a set amount of unsecured short term funds, and a line of credit is not guaranteed to a business. And the last type of short term loan from commercial banks is a revolving credit agreement, and this is a line of credit that's guaranteed.

Factoring Accounts Receivable

Next is factoring accounts receivable, which is selling accounts receivable for cash. What does this mean? Assume you have a tender to supply several schools in your area with food items such as maize and beans. However, not all schools will pay cash upon delivery which means you will have what accountants refer to as accounts receivable. Several schools will owe your business money in the course of doing business. Some of the customers may be slow in paying their bills so a large amount of money may end up being due to your business. You can sell these debts to an intermediary who agrees to buy your accounts receivable at a discount for cash. This is known as factoring accounts receivable and there are several non-bank lenders who offer this service in Kenya. 

Credit Cards 

And lastly, we have credit cards, which is a readily available line of credit. I'm sure you're aware of how credit cards work. If you have a credit card, you can use it to finance your business needs. Bear in mind that the interest rates are very high and only use this option as a temporary measure as you look for more long-term finance.  
If you would like a short-term loan for your business, please check out our article on Loans without CRB check.

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