After you’ve been in business for a year or more, you may be able to get short-term business loans or other forms of short-term financing arises. Short-term loans are usually needed by small businesses for working capital. In addition to loans for working capital, other types of short-term debt financing exist for small businesses.
What Is Debt Financing?
Debt financing is money that a business owner borrows to operate a business. Debt financing occurs when a business owner seeks financing from a creditor or a lender. It is one broad category of small business finance and equity financing is another. Debt financing includes small, short-term loans from hometown banks, as well as long-term bond issues worth millions of dollars for large businesses. You may need debt financing to
Debt Financing for Small Businesses by Maturity
Let’s look at the most common types of debt financing by maturity. Many business loans require collateral, though SBA 7(a) small loans under $25,000 don’t require lenders to secure collateral from borrowers.
How Can Short-Term Financing Help?
Short-term loans are often used to buy inventory for businesses whose sales are seasonal in nature. An example would be a retail business that has to build up inventory for the holiday season. Such a business might need a short-term loan to buy inventory well in advance of the holidays and not be able to repay the loan until after the holidays. That is the perfect use for a short-term business loan. Other uses for short-term business loans are to raise working capital to cover temporary deficiencies in funds so you can meet payrolls and other expenses. You may be waiting for credit customers to pay their bills. You may also need short-term business loans to pay your own bills; for example, to meet your own accounts payable (what you owe your supplier) obligations. You may just need a short-term loan to even out your cash flow, particularly if your company is a cyclical business. Or you may want to take advantage of a business opportunity, like entering a new market that requires investing in more staff or supplies.
How To Qualify for Short-Term Financing
In order to qualify for a short-term loan or unsecured business line of credit, you will have to present comprehensive documentation to your lender, whether it is a bank, a credit union, a mutual bank, or some other type of lender. The lender will want, at least, a record of your payment history for other loans you may have had, including payment histories to your suppliers (accounts payable) and your company’s cash flow history for perhaps the last three to five years. You should also be prepared to hand over your income statement for the same amount of time if the lender requests it. All documentation should be in a professional format. Your qualifications will help determine whether or not the loan will be secured by collateral or it will be an unsecured, or signature, loan or line of credit.
Loans for Start-Up and Small Businesses
Most start-up companies will only qualify for secured loans from a lender. In other words, the start-up firm would have to offer some sort of collateral or a personal guarantee to secure the loan with the lender. Seldom will a start-up qualify for an unsecured loan or line of credit. Many start-ups have to obtain loans from friends or family or take out loans against their home equity.
