Credit, whether long-term or short-term, plays a key role in helping businesses survive and expand. Big businesses are usually able to access credit from a number of sources, including large banks and other lenders. They do this based on their creditworthiness, their financials and their ability to offer collateral against loans. On the other hand, borrowing money often becomes a Herculean task for smaller or newer business, even when their very survival may be threatened by a cash crunch. The main reason for such businesses not being able to gain access to short term finance is the lack of assets that can be used as collateral.
The development of the Indian credit industry in recent years has led to the emergence of newer organizations catering largely to small scale units and helping them meet their funding needs through innovative financial products.
What is Short Term Funding?
Short-term funding can be taken either in the form of business loans or personal loans. The term could be anywhere between three months to two years. Such credit is designed to help businesses meet their immediate requirement of funds for varied purposes. In many cases, these short term loans are used to meet the working capital needs of a business or the temporary deficiencies in capital. Although the cost of such loans may be marginally higher than that of long-term funding, their availability is a boon for small businesses.
Why Short Term Funding?
Small businesses generally depend on short-term loans to launch their business, carry out their daily operations smoothly, expand into new markets and grow their offerings. Funds are required to purchase raw materials at regular intervals, provide compensation to workers and pay their utility bills or other expenses. However, there may be a meaningful delay in the receipt of revenues. Even if the receivables would cover all expenses, they may be due a month or a couple of months after the expenses need to be borne. Thus, even the profitable businesses face significant liquidity crunch. This is when short term funding comes to the rescue, allowing businesses to meet their expenses and keeping the machinery chugging along. This type of funding also allows businesses to capitalize on sudden opportunities or ward off any kind of unexpected crisis.
There are two types of loans. Secured loans are those that are backed by some asset or collateral. This acts as a security in case of a nonpayment. Unsecured loans are those that do not require any collateral.
Short Term Finance Options for Your Business
Some of the most popular forms of short term funding are:
- Trade Credit: One of the most popular forms of term finance, trade credit is offered by suppliers of raw materials and other components. This type of credit does not make the funds available in cash, but facilitates purchases without making immediate payment.
- Bank Credit: Under this type of short term funding, banks grant borrowers the facility to withdraw the amount of credit sanctioned in one go or in installments as and when required. It is available in the form of loans, cash credit, overdraft or discounted bills.
- Customer Advances: A business may require its customers to make some advance payments in case of high value orders. This not only provides business with some quick working capital, but also guarantees acceptance of delivery by the customers.
- Loans from Cooperative Banks: These banks grant loans for personal as well as business purposes. Membership is the primary condition for securing such a loan.
- Commercial Paper: Under this source of short term finance, a business sells promissory notes for a period ranging from two to six months to other businesses, insurance companies, banks and even pension funds.
- Secured Short Term Loans: These are available against accounts receivables or inventory as collateral. Financing through accounts receivable can be done by either pledging them or selling them (factoring them). In case of the former, the risk of the receivables not being paid lies with the borrower, while in case of factoring, the risk is passed to the lender.
- Merchant Cash Advances: These are loans given against the credit card receivables of a business.
How Technology Has Helped Businesses Raise Short Term Finance
Securing the short-term funds that your business needs has become easier with the advent of FinTech companies that make extensive use of technology to provide specialized financial products. The process has been greatly simplified and is nowhere as cumbersome or time consuming as raising funds from a bank. One has the benefit of applying online for such loans by filling out an online form and uploading the relevant documents, which may include the company’s ITR, balance sheet and cash flow statements. The eligibility criteria are not as stringent as those required by banks.
FinTech firms use highly powerful algorithms to help with the screening process, making the sanctioning of loans smoother and faster. Apart from the documents uploaded by the borrower, the approval process takes into account company ratings assigned by rating agencies like S&P and Moody’s. The CIBIL scores of the business owner as well as persons managing the business are also considered.
Since cutting-edge technology is used in the decision-making process, FinTech firms are able to offer short term loans of fairly small amounts. Other significant advantages of this type of financing is the absence of lengthy evaluation processes, less paperwork and the quick sanctioning of the funds you need.
Such short term finance options do not have any penalty on prepayment of the funds raised. Thus, a business can repay the loan as soon as it has the necessary funds. Small businesses benefit immensely from this facility, since their cash inflows can be unpredictable and every penny saved counts.