Unlike long-term business loans, which are the funding option provided by traditional banks and unorganized money lenders to individuals or companies that require financing to meet long-term goals like business acquisition, short-term loans are specially designed to meet a company’s immediate funding needs. There are situations when an unexpected demand or urgent need to take advantage of a new business opportunity requires SMEs to look for short-term capital for quick and flexible funding.
Major Reasons SMEs Need Short Term Finances
There are many reasons why a small business requires quick working capital, although such short-term financing can often be tough to get from traditional lending institutions. Some common situations are:
- To Manage Seasonal Sales Trends
Any business, be it small or large, has a few months in the year that are more demanding in terms of production and distribution than others. However, there also are businesses that are truly seasonal in nature and the impact of the reduced off-season sales is prominent, hitting a small business’s working capital. During such hard times, short-term financing provides that temporary boost to continue running your business operations.
- For Business Expansion
When businesses are doing well, owners think of expansion. However, expansions are expensive and can come with costs you might not have planned for. In addition, during the expansion phase, sales can get delayed. SMEs need financial support and back-up during these temporarily stressful times, in order to facilitate business progress.
- To Take Care of Emergencies
Urgent repairs, the need to replace machinery and equipment or response to emergencies can have a telling impact on the business. It is always advisable that SMEs save for emergencies or at least keep three months’ worth of savings to keep the business afloat during such times. However, sometimes even your financial plan is just not enough. Short-term finance comes in handy at these times to keep the business moving forward.
Unsecured Small Business Loans
During these tough times, traditional banks are the ones SMEs usually approach first. However, most banks do not prefer giving small loans. Even if they do, their stringent eligibility criteria, the requirement of assets as collateral, and good credit score doesn’t allow most SMEs to qualify. In fact, banks will take around 2-3 months just to let them know whether their loan application has been approved or rejected.
Disappointed on the country’s financing criteria for SMEs, small business owners are turning to alternative financing options to secure the much-needed capital. FinTech money lenders are providing business loans in a way that allows them to earn a profit on small business funding, which most banks find unprofitable.
FinTech lenders operate quickly, without the need for a perfect credit score or collateral and even offer short term loans online, where applicants can submit their form within minutes. In fact, the application is usually reviewed and approved within 24 hours, saving a lot of the business owner’s precious time.
FinTech lenders utilize big data, which is extremely large data sets that are analyzed for patterns, trends and associations, related to human behaviour and interactions. These large data sets, along with advanced algorithms, are used to compile the applicant’s information to evaluate their creditworthiness. Bank account activity, credit card activity, payment histories, earnings, deposits, business performance and even the applicant’s social media activity can be used as data points. Using these data points, alternative financiers can make decisions faster and can approve financing that traditional financiers don’t.
Advantages of Short Term Financing
- Different from Traditional Bank Loans: These short-term financiers work somewhat differently from the traditional financing institutions. They feel more than happy to help business owners in fulfilling small business needs. Business owners get the advantage of not committing to unnecessary long-term debt either.
- Shorter Repayment Schedules: Alternative financing options, like FinTech lending, offer small business loans with shorter repayment schedules, where the borrower has the liberty to pay back the loan amount once they have the money, without paying any prepayment penalty.
- Various Loan Options: Invoice financing, line of credit and merchant cash advance are some ways by which FinTech lenders offer short term loans online. A business owner can choose the product that suits their business and its specific needs the best.
- Not Affected by Bad Credit Score: FinTech based small loans are a great option for a small business with a bad credit score. These alternative finance companies, because of the use of current financial technology, known as FinTech, look beyond a less than perfect CIBIL score. These lenders take other factors into consideration when making a decision about providing finance to the applicant.
- Positive Addition to Credit History: Maybe the credit history was poor earlier. But this short term finance, when repaid in a timely manner, can work as a positive addition to your credit history, which can boost your credit score. It will also build a good relationship with your financier and they would be more than happy to provide short-term financing whenever needed in the future.
Short term finance helps businesses to seize quick business opportunities, including transactions to be completed in a short period of time. However, when looking through the resources, it is important to remember that some sources of finance are unique for specific businesses. Do the necessary research to find out what works best for you!