Most small businesses finance their temporary working capital needs through short term business loans. Unlike long term loans, short term loans need to be repaid within one year. But lenders charge a higher interest rate on short term business loans than long term business loans. The limited duration and preset repayment schedule further make it essential for the borrower to maintain a positive cash flow. Hence, the smarter entrepreneurs look for flexible alternative to conventional short term business loans. There are a number of lending institutions that leverage financial technology (Fin-tech) to speed up loan verification and disbursement.
These new age lending institutions even use real-time information to assess the creditworthiness of a borrower. They even implement financial technologies to offer a variety of innovative financial products and services according to specific needs of individual borrowers. The loan products provided by these new age lenders enable small business owners to meet their temporary working capital needs in a quick, flexible and convenient way. In addition to providing a number of short term working capital loans, the lenders even allow borrower to repay the loan in a flexible way without impacting his business’s cash flow position.
Modern Alternatives to Conventional Short term Business Loans
Unsecured Term Loans
The unsecured term loans provided by the new age lending institutions are completely different from conventional short term business loans. The duration of the unsecured term loans do not exceed 12 months. But an entrepreneur can avail this form of credit based on the products or services sold on credit to a specific debtor. He even repay the term loan in a flexible and convenient way by choosing from a number of payment options – daily, weekly and monthly. Some lenders require borrowers to sign a tripartite agreement to enable them to receive payment directly from the buyer. There are also a number of lending institutions that disburse unsecured term loans in 72 hours.
Merchant Cash Advance
This alternative to short term business loans enables entrepreneurs to finance temporary working capital needs through cash advance. A number of new age lending institutions provide merchant cash advance to entrepreneurs based on their future credit card sales. An entrepreneur can opt for merchant cash advance to improve cash flow position or meet immediate financial needs without lengthy approval process. The lender determines amount of cash advance based on the business’s past credit card processing volumes. He even allows the borrower to repay the loan within 12 months. But many lenders allow borrowers to choose from multiple payment options according to their cash flow position.
Invoice/Goods Received Notes Discounting
Many new age lending institutions nowadays provide invoice or goods receipt notes (GRN) discounting services. A business owner can avail invoice discounting services to avail credit by using his unpaid invoices or GRN as collateral. The lenders normally discount invoices or GRN with a credit period up to 30 days. But they require the borrowers to pay certain fees to avail invoice discounting services. Some lending institutions even require the entrepreneur to sign a tripartite agreement that enable them to receive payment from the anchor directly once the bill is due.
Point of Sale Financing
This alternative to short term business loan is designed just like merchant cash advance. The Point Of Sale finance solutions enable business owners to finance their temporary working capital needs by availing credit based on the monthly sales routed through EDC terminal. An entrepreneur can easily raise more funds by encouraging customers to make payment using their debit cards or credit cards. Also, the borrower can avail the credit just like an unsecured term loan and with duration of 12 months. Many lending institutions allow the borrowers to repay the Point of Sale based working capital loans conveniently by choosing from two distinct repayment options – fixed daily installment and daily percentage deduction. Here are some important things to know about Point of Sale Finance.
However, the types of short term credit products provided by individual lending institutions differ. Some of these short term credit products even require borrowers to pay interest at a higher rate. Also, the borrower must meet the eligibility criteria set by the borrower to avail a specific short term credit product. A borrower can easily avail these credit products by maintaining a good personal credit score. Many entrepreneurs nowadays prefer these short term credit products to conventional short term business loans to avoid lengthy approval process and strict credit requirements.