SHORT TERM FINANCE: How to Get One

Short term finance loans are borrowed funds that are used to meet obligations for a period of time ranging from a few days to a year. The borrower receives cash from the lender more quickly than with medium- and long-term loans, and has a shorter time to repay it. With examples, we’ll look at the sources of short term and property finance in this article.

What is Short Term Finance?

Short term finance refers to borrowing for a short period of time, usually less than a year. It’s also known as working capital financing in the business world. Because of the uneven flow of cash into the business, the seasonal pattern of business, and other factors, this type of financing is frequently required. It is typically used to finance all types of inventory, accounts receivables, and other similar items. Only specific one-time orders of business are sometimes financed.

Examples of Short Term Finance

Susan took out a $10,000 loan with a 5% APR for a six-month period. Since the loan is for a shorter period i.e. the period of less than one year, it will be treated as short term finance. After six months, the couple must repay the loan amount plus interest.

Advantages of Short Term Finance Loans

• Less enthused: As these are to be paid off in a very short period within about a year, the total amount of interest cost under it will be least as compared to long term loans which take many years to be paid off. The long term loan total interest cost might be more than the principal amount.
• Quickly disbursed: As the risk involved in defaulting of the loan payment is lesser than that of the long term loan as they are having a long maturity date. Because of this, it takes lesser time to get sanctioned the short term loan as their maturity date will be shorter. As a result, the loan can be approved and funds disbursed immediately.
• Less documentation is required: Because it is less dangerous, the documentation necessary for it will be minimal, making it a viable option for anyone looking for a short-term loan.

Disadvantages of Short Term Finance Loans

The main disadvantage of short term finance loans is that it is possible to obtain a smaller loan amount with a shorter maturity date, allowing the borrower to avoid being saddled with larger installments. It is predetermined that the loan time will be less than one year, and if a large amount of money is borrowed, the monthly installment will be quite expensive, increasing the risk of defaulting on the loan and negatively impacting the credit score.

It may leave the borrower with little choice but to fall into the cycle of borrowing, in which one borrows again to repay a previously defaulted loan. The interest rate is rising in the current cycle, which might have a negative impact on the firm and its liquidity.

Types and Sources of Short Term Finance

There are different sources of short term finance for a firm, as we have seen why we require it. Each sort of short term finance has its own set of features and can be applied to a variety of scenarios. The following are a few of them:

#1. Trade Credit

Yes, you have understood correctly. It’s the credit given by the accounts payable department. This credit can be divided into two categories: free trade credit and paid trade credit. The provider charges interest on late payments after a certain number of days as specified in the payment terms. So, before this, there is no charge for trade credit, and after that, there is a charge for trade credit.

Because it is free, it is evident that the free trade credit should be used as much as feasible. How much does a consumer get in free trade credit? It relies on the buyer’s creditworthiness, payment commitment discipline, the volume of business, and so on. The higher you score on these factors, the more free trade credit you’ll have accessible to you.

Paid trade credit is undoubtedly a form of short-term funding, but it is far down the priority list. In other words, it should only be used when no other options are available. The high-interest rate is the reason for not choosing it.

#2. Loans for working capital (short-term)

Banks and other financial entities can provide short-term loans. These loans are granted following a thorough examination of the company, its working capital cycle, prior performance, and other factors. Once taken out, these loans can be returned in small installments or in full at the conclusion of the term. This is determined by the loan’s terms. These loans should be used to fund long-term working capital requirements. There are different ways to cover the short-term working capital requirements. Working Capital Loans has further information.

#3. Business Line of Credit 

For temporary working capital needs, a business line of credit, a sort of short-term finance, is the best option. An amount is approved by the issuing bank or financial institution in this sort of financing. The firm can make payments and continue depositing once payment from customers is received up to the maximum of this amount. It operates like a revolving credit card, and the best thing is that interest is only charged on the amount that has been used, not on the amount that has been approved. The company has the option of depositing unused funds to save money on interest. It becomes a very cost-effective financing solution in this way.

#4. Invoice Discounting

Another source of short-term finance is invoice discounting, which involves discounting receivable invoices with financial institutions, banks, or other third parties. When you discount an invoice, the bank pays you the money at the time of discounting and collects the money from your customer when the bill is due.

#5. Factoring

Factoring is a similar arrangement to invoice discounting in which a company’s accounts receivables are sold to a third party for a lower price than the accounts receivable’s realizable value. A factor is the term for the purchasing party. Both banks and other financial institutions offer these factoring services. There are various sorts of factoring, such as with or without recourse.

Financing Options: Short-Term vs. Long-Term

The time span, purpose, and cost of financing are the most significant differences between the two types of finance. The time period is easy to comprehend. Short-term finance usually lasts less than a year, but long-term financing can last up to 20, 15, or even 20 years. Both sources of finance have completely different goals. Short-term financing is typically utilized to bridge a company’s working capital imbalance. In contrast, long-term financing is necessary to finance large projects, PPE, and other items. The third factor is the cost of financing, which is greater for short-term loans and lower for long-term loans, barring unusual economic conditions.

What is Short Term Property Finance?

You’ll almost certainly be looking for a Bridging Loan if you need short term property finance. Bridging Loan agreements can be set up for terms of 1 to 12 months, though if you choose an unregulated lender, you may be able to secure terms of up to 18 months. Bridging Loans are asset-backed loans that use the property or land you’re buying/developing as collateral. They can be completed in as little as 48 hours, depending on the intricacy of the request.

How Much Can I borrow with Short Term Property Finance Loans?

Aside from the fact that they’re short-term agreements, another benefit of using a Bridging Loan is that they offer up to 100% Loan-to-Value (LTV) and aren’t bound by any borrowing limitations other than those set by the lender. This means you might borrow the entire amount required to cover the overall purchase price of the property or land in question. Short-term finance bridge loans can also be used to acquire property at auction and support refurbishment and/or renovation projects. This is in addition to supporting purchases.

How Does Short Term Property Finance Loans Work?

Bridging Loans are unlike any other type of business finance you’ve ever seen. To grasp how they function, keep in mind that bridging loans treat the principle (the amount borrowed) and the interest owing as two distinct components of the arrangement. As a result, the first consideration should be the Principle, which will also influence the duration of the term.

#1. Principal

You have two options when it comes to selecting how to settle the Principal and, by extension, the agreement. There are two types of bridges: open and closed.

• Open Bridge. Open Bridge products do not bind you to a certain payback date. However, they do require you to return the loan within a set term of time (e.g. 12 months).
• Closed Bridge. When using a closed bridge solution, the agreement must be fully repaid by a certain date. This date is also the agreement’s maturity date.

#2. Interest

Then you must select how you will pay off the interest that will accrue during the term of the agreement, as well as when it matures. You have three alternatives to achieve this: Pay Monthly, Rolled-Up Interest, and Retained Interest.

• Monthly Interest Payments. Until the agreement matures and is settled, you must make monthly interest payments at the end of each month.
• Rolled-Up Interest. When the agreement matures, the total amount of interest owed is coupled with the complete amount of capital borrowed and made payable as a single payment.
• Retained Interest. This option allows you to borrow the interest you’ll pay over a set period of time, which is also subject to interest. The lender, on the other hand, keeps this and uses it to assist you with your monthly interest payments. When the loan has been returned in full If you have managed to repay the agreement early or haven’t spent all of the interest that was held, the lender may reimburse a portion of these cash to your business.

How do I Obtain a Short Term Property Finance Agreement?

Short-term property finance may be the ideal means of purchasing and developing land or property. That is, if you’re searching for a flexible finance solution that won’t tie you down for a lengthy time. An agreement could be achieved in as little as 48 hours. However, the success of your application is contingent on you having a thorough understanding of the requirements and expectations of lenders. As a result, you must consider the following parts of your application to guarantee that you can meet their requirements: 

#1. Repayment Strategy

Lenders will always want to know how you plan to raise the necessary funds to repay the agreement. This is normally accomplished through the proceeds of a property sale, the sale of assets, or another kind of finance.

#2. Creditworthiness

Lenders will typically seek access to your company credit profile in order to better understand your present financial situation. So, having a bad credit score won’t necessarily be used against you. However, it may affect the interest rate you’re provided. When submitting an application, keep in mind that lenders will look at whether your company has previous and/or recent CCJs, Accelerated Payment Notices, arrears, unpaid debt (e.g. credit card debt), existing financial commitments, and a history of paying debts on time.

#3. Security

Bridging Loans are secured loans that employ the land/property you’re buying as security, or another asset in your portfolio. As a result, if your company is unable to resolve the agreement for any reason and defaults, the lender may be forced to repossess the land/property in question.

#4. Documentation 

In addition to your application, you will be required to submit a number of important documents. This should be prepared ahead of time to avoid any needless delays. You’ll often be asked to provide documents such as proof of identity, recent and past bank statements, profit and loss statements, trading accounts, and details of the land or property in question (e.g. address, freehold/leasehold, and purchase/market value). Although, these should be outlined in the documents sent to you by the lender when making an inquiry.

In Conclusion,

If you’re considering buying or developing property in the UK, one factor that may be driving you to reconsider your plans is the financial commitment required. However, if you want to spread out the finance without committing to a long-term loan, a Short-Term Bridging Loan can be the way to go. However, because they usually have a high-interest rate, you’ll want to get an agreement from a reputable lender at a competitive rate. Though it may appear to be a difficult task, you don’t have to go it alone in the UK lending market. Help is on the way.

Short Term Finance FAQs

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