Whether an individual or a business keeping track of your finances is a constant worry, or at least something that is regularly checked. You could be earning a lot of money one year before finding interest in your business suddenly drops.
Managing such incidences can be tricky and often businesses and individuals alike look for short-term financing to plug the gap. But what do you need to know about this potentially risky form of financing?
What is short term finance?
Essentially, short term finance is a term used to describe loans that are to be paid back on a shorter timescale than typical loans. Sometimes this means a loan of under five years but is more typically used for those of up to 12 months only.
They are frequently referred to as bridging loans because they are typically applied for when a borrower needs financing for a property that is required to go through quickly, such as buying a house from an auction. The loans naturally vary from company to company with the variation between them being the interest rate and fees or charges added on.
Keep your accounts in order
Sometimes it is unavoidable and you or your company will need to apply for a loan to cover immediate expenses even if money is expected to arrive in the near future. It is important not to rely on any type of loan and instead advisable to make sure your company’s finances are in order. If they are, seeing when a loan will be able to be paid back becomes much easier.
With online accounting softwareyour small business can have extra help with its payroll and accounting services. Depending on what suits your needs, online accounting software typically helps control your cash flow, produces VAT returns for HMRC and ensures your staff are paid the correct amount on time. Sage One’s new Accounts Extra is the perfect example of a programme capable of all this and more.
When is short term finance an option?
As a small business, taking on a loan of five or more years can be a big investment and one that comes with uncertainty considering your company might not even last that long.
Long term loans are also harder to get as a start-up company as you will be deemed more of a risk without years of turnover to show to potential lenders. Instead, many small businesses take out short term loans to meet pressing financing needs. They are typically paid back far more quickly than the year and come without the extended commitment.
It is not a substitute for long-term planning
That said, taking out too many short term loans is not the route to planning a successful business.
It is a good idea to use a short term loan if you need to build up stock ahead of a potential busy season but staff wages and balancing your cash flow are less than healthy uses for a short term loan. Staff and the short term loan should be paid out of the profits of the season.