When To Use Short Term Financing for Your Business?
As a business owner, you are making important decisions in your business, every day. Many of those decisions depend on your capacity to raise funds. Here’s when financing comes to play. Striking a balance between equity and financing, you have to know when you need short term financing and when you need long term financing.
In our previous article, we have revealed the Most Common Reasons Why Malaysian SMEs Seek Business Financing. The article also discloses the Top 3 Short Term Financing available to fund your business. However, short term financing cannot solve all financing needs.
Let’s look at 8 distinct scenarios when short term finance is the answer!
1. Urgent Need for “Quick Cash”
Unexpected expenses are a part of running a business. You may need the cash to fund an unfinished project or to pay for sudden legal expenses. To get quick cash funding, you can apply for short term financing until such emergency surpasses.
You have two choices; you can apply for bank financing which may take a few weeks to over a month depending on how quickly you arrange the documents and collateral to apply for the financing. Or you can opt for alternative financing. You only have to provide a few documents supporting the proof of your business ownership, your cash flow status and your credit score to make the application, which can be approved as fast as 3 days.
2. Having Difficulty in Cash Flow Management
According to SME Corp Malaysia, 35.9% of Malaysian SMEs face cash flow problems and the most common problem is delayed payments from their clients. If your business sells on credit, you need to wait for an average payment period of 90 days and even up to 120 days to receive your payment from the clients. During this waiting period, your business often runs short of liquid cash to sustain daily business expenses and attend to new clients. Short term financing such as invoice financing can help you to finance your business needs during this temporary period.
To further enhance your cash flow, read 12 Ways to Improve Your Cash Flow Cycle in 2020
3. If You are a Young Business, Operating for Less than 1 Year
When you are a young business, your investment is more than your earnings. While you are chasing for more clients, a small infusion of cash can help your business to continue operating. Besides, you need extra funds to cater to your start-up costs like paying the deposit for your office space and fulfilling market demand. Short term financing can help you to get this extra cash boost until your business is ready to run in full force.
4. Need to Purchase Equipment or Inventory
As your business grows, your equipment becomes older. Sometimes, the equipment starts malfunctioning or becomes outdated and you need to buy a new one to replace it. And, if your business is growing, you must need more inventory to attend to your increased pool of clientele. Use short term financing to fund these needs efficiently.
5. Cash Shortage during Holiday Seasons
Holiday seasons are an excellent time to maximize your sales. People’s mood is elevated, and their pockets are full. However, you need to gear up for the festive seasons. You need more inventory and additional staff to serve the large volume of clients. You may also need to spend on advertisements to promote your exclusive deals designed for the festivals. All these preparations need money. To help you get the influx of cash to prepare for the holiday seasons, short term financing is the best solution.
To know more about how to optimize your cash flow in festive seasons, read 5 Ways to Optimize Your Cash Flow for Chinese New Year
6. Taking on More Clients
Getting more clients is always good news but what happens when you don’t have enough capital to serve them? An easy way to squeeze out of such a situation is to take short term financing. You will get the fund to attain more clients. More clients mean more money and a step forward in expanding your business.
7. Planning for Business Expansion
If you are thinking of a business expansion, short term financing can provide you the extra funding that you need to finance temporary expenses to help you grow and expand.
8. Planning to Hire More Staff
When your business starts to grow, you may need to hire more staff to manage it. So, you have to invest in your internal Human Resource (HR) department or hire an external recruitment agency to seek the right candidate for your company. Upon hiring, you have to invest in each staff’s salary, bonus, and monthly performance incentive. You can opt for short term financing to raise the extra fund needed for the initial cost of this hiring process.
9. Need to Build Your Credit History
If you are a small company, you need to have some strong credit history to apply to traditional banks for bigger financing. To get started, initiate with short term financing from alternative lenders and maintain a good track record of payments. It will help you in the future to negotiate better interest and financing terms when you apply for long term financing from banks.
To summarize, use short term financing to serve your temporary capital needs. Always align the duration of capital deficiency with the duration of financing to ensure that your need is only temporary. Short term financing gives you the extra boost you need to enhance and expand your business.