Business Case Studies

The Best Short-Term Funding Options for Small Businesses

It’s no secret that funding and cash flow issues are common with SMEs. However, finding funding when you have no, little or bad credit history can be even more of a challenge. Fortunately, there are some short-term options available to small business owners which can help them get through a rough patch and keep their business running. In this article, we’re going to give you some of the best short-term funding options small businesses can use.

Bootstrapping

You’ve probably heard the expression “pulling yourself by the bootstraps” before. Well, that’s exactly what bootstrapping is. Bootstrapping is when a business owner pools from his own resources to fund the business.

There are plenty of ways that you can do this. You could sell some of your assets or liquidate some of your liabilities, like a house or a car, for instance. Or you could leverage some of your home’s equity and get some capital that way. You could also use 0% interest credit cards or your personal pension plan.

One of the best things about bootstrapping is that owners don’t have to give away any ownership to investors. They don’t have to issue equity either and all debts are focused on personal sources. But that could be a downside too since the entrepreneur assumes all the risk. And the amount of money you raise might not be enough for your needs either, so you may have to look at other options as well.

Loans and Lines of Credit

Applying for a line of credit or a loan is another option you can consider. But what is the difference between the two exactly? Well, a loan is a lump sum that you’ll have to repay over a certain period of time and will have either a fixed or variable rate of interest. Lines of credit, on the other hand, are pretty much identical to credit cards and will give you a certain amount of money you can borrow against at any given point in time.

Both options do have their drawbacks though. It is easy to go overboard and lose control of debt when you’re too reliant on your line of credit. And getting accepted for a loan isn’t always easy. While there are some alternative lenders that will issue loans to people with questionable credit, not all of them are created the same, and getting a loan when you have nothing to show can be difficult.

However, there are some alternative lenders that will provide small short-term loans to business owners and will often have much less stringent criteria. But that doesn’t mean anyone can just walk in and get a loan. According to cashlady.com, alternative lenders must still perform affordability checks first. So, if you were thinking of going that way, you have to make sure that you don’t have outstanding debt, can prove your income, and try to limit the number of loan applications you submit if you want to increase your chances of being accepted.

Invoice Factoring

Invoice factoring is another great funding option for small business who have a lot of regular clients. With invoice factoring, you sell the invoice to a third-party who will give you a portion of the invoice upfront and keep the rest as a fee. This way, you can get some of the money from the invoice before it is paid.

However, invoice factoring isn’t for everyone and not all businesses will get accepted. The criteria to qualify for invoice factoring are often very stringent and only companies with a certain volume and history are usually eligible. And you can also end up paying much more than you would when compared with other traditional lenders.

Friends and Family

You could also consider borrowing from your friends or family as well, but this one can get tricky. They might not have the funds available or simply may not believe in your idea. That’s why you should approach them as you would any lender and have a solid business plan in hand. You also have to be aware of their personal situation as well.

Make sure that you are honest about the amount of risk involved. You cannot declare bankruptcy from personal loans. This is money that will be on your conscience no matter what if you can’t repay them, so make sure that both of you are well aware of the risk and that you don’t gamble with money belonging to your close friends and family on some get rich quick scheme.

Conclusion

With alternative lending and the number of different lenders that are open to small business owners, finding funding can be done if you know where to look. Make sure that you use all the options at your disposal and choose the one that works the best for your needs.