Vendor credit is an excellent short-term business loan option because it gives you time to convert those costs into sales to your own clients or customers.
While not a traditional creditor-borrower relationship, some vendors may be willing to report your on-time payments to the commercial credit bureaus, which can help you establish and build your business credit history.
Invoice financing is a specialized short-term small business loan that’s considered a cash flow loan instead of a term loan.
You can apply for invoice financing if you’ve sent a client or customer an invoice but haven’t received payment. The lender will require the invoice to be used as collateral to secure the loan. You’ll then repay the debt plus interest and fees when you receive payment from your client or customer.
The amount of interest you’ll pay with invoice financing depends on the lender, the invoice and your creditworthiness. But you can generally expect to pay an interest rate between 13% and 60%.
Invoice factoring is a similar term you may come across when you research invoice financing – however, the two are not the same. While invoice financing involves borrowing money with an invoice as collateral, invoice factoring doesn’t involve a credit relationship at all.
With invoice factoring, you sell the invoice to a third-party company in exchange for upfront payment – typically 70% to 90% of the invoice amount . The new company now owns the rights to the payment and will work with your client or customer to get payment.
Invoice factoring doesn’t involve any interest or fees, but it may end up costing you more with the discount the seller takes.
Merchant cash advances
A merchant cash advance is another type of cash flow loan, with repayment terms based on your credit and debit card sales instead of a set time period.
As the name suggests, a merchant cash advance is an advance on your future credit and debit card sales. This means that you likely won’t qualify unless that revenue source is strong.
If you do, however, you’ll get the loan funds upfront then pay back the lender with a percentage of your future sales.
Merchant cash advances are easy to qualify for because they’re secured by your cash flow. However, they’re one of the most expensive forms of business financing. Depending on the situation, interest rates can range from 20% to 250%.
As a result, merchant cash advances should typically be considered as a last resort, and only if you know you can repay the debt quickly.
Business credit cards
While it’s possible to carry a balance on a business credit card indefinitely, they’re typically considered a short-term business loan because you can use your card and pay off the balance in full every month.
Business credit card interest rates can run upwards of 20%, but you typically won’t see many charging 30% or more, and many offer interest rates in the mid-teens. What’s more, some business credit cards offer introductory 0% APR promotions, which can allow you to regulate your cash flow situation and get up to a year or more to pay off your debt interest-free.
In addition to that kind of perk, you may also get a card that offers rewards on everyday purchases you make and several other valuable perks.
Whether or not you get another type of short-term business loan, it may be worth having a small business credit card to get value back on your regular expenses.
Because short-term loans come in different shapes and sizes, every lender will likely have their own qualification criteria, but as a general rule, those requirements are less stringent than a traditional term loan at the bank. Many online lenders offering short-term financing today, for example, want to see at least a year in business, annual revenues of $100,000, and cash flow that will support daily or weekly periodic payments. The personal credit score requirement is also much less strict. Some short-term lenders will approve a loan application if the business owner has a personal score of at least 550-substantially less than what would be approved at the local bank.