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Short term financing options - the good, the bad, and the ugly

Updated: Sep 12, 2022

You can have all kinds of sales, but you can't pay your bills until you have the cash. You need working capital to run your business, and you need it now. The time between when you pay bills and when you get paid is your cash conversion cycle. The trick is to manage this efficiently. Enter short term financing....

You don't always need a loan to get financing. Financing is simply getting working capital to use in your business. Let's think about a few ways to manage your short term cash needs.


Float: Who's the dinosaur still writing paper checks? You are! It takes a few days between when you send a check to a vendor and when it clears - float. You can take advantage of this time. It may not seem like much, but if your money is in a savings account earning interest for 3 extra days, that adds up. If you don't know what a paper check is, you can use the scheduling feature available on most online payment websites and schedule for the latest day possible for payments to draft from your account.

Trade Credit - #1: Invoices from vendors have payment terms. Net 30 is a common term and means that payment is expected in full 30 days from the invoice date. What this means for you is you have an interest free loan for 30 days for the amount of the invoice. Sadly, not every invoice has these terms. See Trade Credit #2 below..

Bank Line of Credit: A line of credit is an on demand, short term credit facility that can be linked to your business checking account. It automatically funds any checks that would normally overdraw your account. When money is back in your account, the line is paid down. Interest is paid separately on a monthly basis at much cheaper rates than a credit card. You may have to provide extra reporting to the bank to maintain the line of credit, but it's well worth any reporting hassles.

Credit Cards: Get a credit card for the business that has some perks. Cash back as a percent of purchases can be applied to the outstanding balance. What's better? You can use the float built into the credit card's billing cycle. Since credit cards charge higher interest rates, make sure to pay the entire statement balance each month. This one takes some discipline and will likely require the owner to personally guarantee the card. If used properly, it's a great cash management tool. If you let balances get out of control, the fees can pile up. (This one can be good or bad.)

Trade Credit #2: Another common payment term is 2/10, net 30. This means there is a 2% discount for payment within 10 days. You can still wait to pay the invoice in full in 30 days, but it will cost you... 37.5% APR. Holy usury fees, batman! The moral of this story is to take advantage of discounts whenever possible.

Factoring: A funding advance from business receivables is done through a factoring company. They charge fees and hold back reserves based on the collection risk of the receivables sold. Interest rates are similar or higher than credit card rates. Think of this one as a payday loan - easy to get and hard to get beyond.


To get the most out of short term financing, use a combination of these different options. Be careful with trade credit and factoring. If you take some time to consider how each can impact your bottom line, you can find the best solution for your business.

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