Everything you need to know about short-term loans

Faced with unpredictable circumstances, many times companies may need more capital to deal with some kind of deficit. In this case, short-term financing is a good alternative, especially for small and medium enterprises. It allows them to obtain money in advance and paying a low percentage of interest.

What is short-term financing?

The short - term financing consists of a loan made by a financial institution, representing an opportunity for businesses. This credit must be returned in a short period of time, which ranges from a few weeks to a maximum of two months. Due to its multiple benefits, it is a financing option for companies that is quite attractive.

The procedure is similar to that of mini credits, where loans are made for small amounts of money and interest is usually low, so there are few risks in applying for this type of credit.

Types of short-term financing

The types of short-term financing available today are very diverse. Among the main ones are:

Funding through inventories

The company's inventory is used as a guarantee to ensure the repayment of the loan. If for some reason the creditor does not meet the return period, the entity may take possession of all the inventory, involving a great risk to the company in case of default.

Financing through accounts receivable

It consists of the sale of accounts receivable from the company, a process that is carried out through an account agent. This is carried out under previously established agreements, and in this way the company can obtain the necessary resources. It is an increasingly used method since it is less expensive compared to other types of financing, there are no collection costs and the agreed amount is obtained quickly.

Bank credit

It is obtained through banks and is the method most used by companies due to the reliability and trust offered by these types of entities. The benefits are greater if the company goes to the bank that manages its accounts, as this will allow a less risky financing model to be carried out based on the company's financial data.

One of the drawbacks of this method is the low flexibility of the bank in terms of the loan conditions, which is why many companies go to other types of financial institutions.

I'll pay

It consists of a written document that establishes a payment commitment between two people or entities. This shows the loan amount, the date for repayment and the agreed interest. In case of default, it is possible to take legal action. This type of document is usually carried out during the purchase or sale of merchandise or in cash loans.

Commercial credit

In this case, the company's liabilities, such as accounts payable and taxes, are used to establish an agreement between the parties involved. The conditions tend to be more flexible than in the case of bank loans and it is easier to obtain the necessary resources due to their simpler requirements.

Credit lines

The bank grants the company the availability of an amount of money for a certain period of time. In this case there is no legal document between the parties, but previously established agreements must be respected. This method offers some advantages, such as the possibility of obtaining money whenever necessary. However, with each loan made you must pay a percentage of interest.

This type of financing is only available for those companies that have long been clients of the bank and have the ability to pay to meet the interests involved. Once the deadline has expired, the credit line is canceled, so the company must negotiate again for the opening of a new line.

Commercial papers

These are unsecured promissory notes issued by large companies in order to obtain interest. It is a beneficial method for small companies because it allows them to obtain a source of financing with low costs and in a short time. Commercial paper is only designed to meet short-term needs.