Short term financing can help you in both your business and personal lives as a way of taking advantage of an opportunity, growing your potential or helping you out of a financial bind. Unfortunately short term finance has a somewhat tainted reputation because when most people think of short term finance they think of pay day loans, which have exorbitantly high interest rates, numerous fees and very short payment terms which can compound your money problems when you have to quickly repay your debt.
What Are Your Options with Short Term Finance
Therefore, following are some of the best, most responsible ways to secure short term finance, which will suit your needs and budget.
1 – Trade credit
This type of short term finance is most commonly used by manufacturers and traders who need to secure supplies of raw materials or even finished products and components, to allow them to take possession of the item and pay at a later day. Trade credit typically comes with 30 to 90 days of credit in which the manufacturer can make the payment, which they will usually do after they have been paid by the customer for the product they have produced with the materials.
In this instance you are not receiving the funds as cash, but you are able to make a purchase without the need of ready cash. Typically the supplier will complete a credit check on the manufacturer before extending them credit terms. This is a popular form of short term finance in many businesses for example a wedding planner who gets credit from a marquee hire company to secure a wedding marquee until she is paid by the bride, or a carpenter who is extended credit by the lumber yard until his customer pays for the table being built.
2 – Bank credit
Banks are not usually your first thought for short term finance because you tend to associate bank loans with a lot of paperwork, meetings and waiting periods. However, there are several ways you can secure short term financing from your bank if you need it:
- Personal loan. A personal loan can be taken out for as little as one year and if you are able to offer security against the loan the approvals process can be significantly shortened. You can use a personal loan for a holiday, debt consolidation, to buy a car or even home wares. Good security is often your home, but make sure you are aware of the risks, because if you default on your personal loan the bank can seek the value of your loan by liquidating the security.
- Credit card. There are almost as many different credit card offers as there are people with credit cards, so you are sure to find one which suits your short term finance needs. For example, you may need a high limit for a big purchase or just a small limit to help you pay a few bills. For a big purchase you may need some time to pay it off, and a low interest rate will be a priority, however, if you can pay your credit card purchase off in a month or two, you can take advantage of the interest free days on the card. Just make sure you also compare the other costs of the card such as the annual fees.
- Overdraft. With an overdraft you have the security of knowing you have finance available whenever you need it. An overdraft is typically attached to a standard transaction account, and is a function which allows you to spend more than you have available in your account if you need to. Fees may apply to activate an overdraft, which must also be approved, and you will be charged interest on the overdrawn amount, which typically needs to be repaid within the month.
- Discounting bills. If you take bills of exchange or promissory notes into your bank, they can advance you money by discounting. The bank will credit the amount to your account after deducting a discount, where the discount is the amount of interest for the period of the bill.
3 – Customer advance
Cash flow can be a significant issue for businesses big and small and where good cash flow makes for a steady business, poor cash flow can mean your demise. As a result, you may often find yourself in need of short term finance, and in some cases you may be able to ask your customers to fund you. Some businesses will ask their customers to make an advance payment on products or services to be provided, especially on large orders, where the costs will be extensive to fill the order.
The customer then pays the remaining amount of the invoice on delivery of the goods or services and you have been able to use the advance amount in the short term to keep your business cash flow healthy.
4 – Consumer instalment credit
This is a popular form of short term finance if you are looking at buying items such as a TV or a refrigerator. You simply pay a small deposit amount for the item and you are able to take it home that day. The store then sets up a repayment plan of instalments, plus interest, until the item is repaid. This can also be set up as a rent to buy system, where you make your instalment payments over a certain term and when the item is repaid you have the option to keep the item, or upgrade it for the newer model and start a new instalment plan.
To help you decide on the best type of short term finance for your needs, make sure the option you are considering is:
- Economical. The benefit of short term finance is that it is quick and easy to organise so that you can make that bill payment or you can snap up that bargain fridge. Just make sure you’re not paying too much for this added convenience.
- Flexible. Your short term finance needs may not always be as clear as a particular model of refrigerator and so it is important that you can secure short term finance on a flexible term, and for a flexible amount, allowing you to use the amount you need, without having to pay for any extra credit which has been extended.
- Beneficial. Applying for a credit card and managing your repayments responsibly will reflect positively on your credit report. Similarly, if you are approved for trade credit, you can continue to reap the benefits of this easy form of short term finance for a number of years, so that you don’t have to reapply each time you want a supplier to extend you credit. As a result, short term finance can be beneficial in the long term, if used correctly.
SSAT is an experienced personal finance blogger. He has published over 400 articles over the past 3 years. When he is not blogging, he contributes at major blogs, where he compares bad credit personal loans.