Understanding Short-Term Finance

The Importance of Financial Flexibility

Short term finance is a growing part of the business finance market, whether it be to cover immediate expenses or seize unexpected opportunities without long-term commitments.

Current market feelings suggest it is a lot harder to acquire support from HMRC since COVID-19 and pre–Crown Preference rules.

For businesses to thrive in an unpredictable environment, quick access to funding can make all the difference. By familiarising themselves with the various short-term finance options, business owners can ensure they are well-equipped to navigate whatever challenges arise.

Benefits of Short-Term Finance

Short-term finance offers several key benefits that can be invaluable for businesses in need of immediate funding:

• Quick Access to Funds – One of the primary advantages is the speed at which businesses can obtain the necessary funds. This is crucial when time-sensitive opportunities or unexpected expenses arise.
• Cash Flow Preservation – Short-term financing can help maintain working capital, ensuring they have sufficient funds available for operational costs and day-to-day expenses.
• Simplified Credit Processes – Compared to long-term financing options, short-term finance has  a typically more straight line credit process and simpler requirements, making it more accessible to a broader range of businesses.
• Stability in Uncertain Times – In periods of economic uncertainty, having access to additional options can provide a safety net or piece of mind, helping businesses navigate short-term challenges without the pressure of long-term commitments.
• Minimal Long-Term Commitments – Short-term finance allows businesses to meet their immediate needs without being tied down to long-term obligations, offering greater flexibility in managing future financial planning.
• Budget Predictability – Fixed loan repayments provide a clear and predictable expense schedule, aiding accurate budget planning.

However, when considering short-term finance, two critical questions need to be addressed: How quickly do you need the funds? and How long do you need them for? It’s important to note that everyone’s definition of “short-term” can vary.

Common Uses for Short-Term Finance

Businesses often turn to short-term finance to cover specific needs, such as:

• Stock Purchases or Seasonal Ramp-Ups – Financing can be used to purchase additional inventory or scale up operations in preparation for busy seasons.
• Tax Bills, VAT, or Corporation Tax – These predictable yet substantial expenses can be managed more effectively with short-term funding.
• Bridging Financial Gaps – Whether it’s securing property or bridging a trading period, short-term finance can bridge the gap between immediate financial needs and future income.

Key Considerations Before Committing

Before committing to any short-term finance solution, it’s essential to consider several factors to ensure it aligns with your business’s financial health and goals:

• Repayment Terms – Short-term finance options can range from 3 months to 2 years. It’s crucial to assess whether your cash flow can sustain the repayment schedule over this period.
• Costs and Fees – Short-term financing typically comes with higher interest rates or fees. Understanding the total cost of borrowing is vital to avoid any financial strain.
• Directors’ Recourse – Due to the expedited nature of short-term finance, many facilities require directors’ guarantees, which means personal liability could be a factor.

Types of Short-Term Finance Options

If short-term finance seems like a viable option for your business, here are some of the most common types available:

• Business Line of Credit – Usually a revolving credit facility whereby the business can draw down on funds up to a credit limit as and when they need.
• Short-Term Loan – Lump sums of money paid off over a short period of time, typically incurring high interest charges.
• Single Invoice Financing – Factoring an invoice where the funder advances a percentage of the invoice amount to the business which will be repaid once the customer pays the invoice.
• Merchant Cash Advances – Providing a cash advance to the business with repayments being made via a negotiated rate of every future card payment until the balance is cleared.
• Supplier Finance – An access window whereby invoices can be uploaded within this time and repaid over a short period of time after.
• Bridging Finance – A facility taken as a first or second charge over property to fill a short to medium term funding gap.

Ultimately, short-term finance can be a powerful tool for businesses needing quick access to funds without long-term obligations. However, it’s essential to carefully assess the repayment terms, costs, and potential risks associated with different financial products. By doing so, businesses can ensure they are leveraging short-term finance effectively to support growth, stability, and success in uncertain times.

If you’re considering short-term finance, we encourage you to explore your options and contact us to help you find the best fit for your needs.