There will always come a time when you, as a business owner, need an infusion of capital to solve a problem or seize an opportunity -- and sometimes you need that funding quickly.
But like the rest of us, business owners are subject to the same whims of human nature. Sometimes they move too fast when looking to borrow money on a pressured schedule: the immediate needs of the business can overshadow the need for due diligence.
Unfortunately, this can create some big problems down the road. By moving too fast and not thinking things through before signing a contract, you might expose yourself to some problems that could've been avoided--leaving you in an even worse position than before.
With that in mind, let's take a look at some of the most important things that every business owner should consider before pursuing a fast small business loan.
Is it worth opting for the faster timeline?
Generally speaking, fast cash is expensive cash. You'll pay for the faster service with higher fees or interest rates.
Is that tradeoff worth it? That's a question every borrower needs to ask themselves before committing to a loan. If that financing prevents your business from spiraling into financial distress or lets the business close a deal that could significantly improve its profits, then it might indeed be worth your while to pay the higher price tag.
But if the need that the loan fills isn't quite as urgent, it could make better financial sense to take a slower, more conventional route.
Have I looked into the various fast lending options available?
There are plenty of ways that small business owners can secure fast funding. Each method brings its own positives and negatives to the table, so it's important that you weigh all choices carefully and pick the right option for your business.
Let's walk through some common loan products that can be processed quickly:
1. SHORT-TERM LOANS
A short-term loan helps businesses deal with pressing cash flow shortages, gaps between customer and supplier payments, and other situations that demand fast funding. These loans are also popular for when you need to handle one-off events, like an outstanding tax payment or company expansion.
Short-term loans are structured similarly to conventional loans, except they have an expedited repayment schedule--extremely expedited in some cases. Payments are often made daily rather than monthly.
There are some drawbacks to short-term loans to keep in mind, though.
First, many lenders offer them with "factor rates" (sometimes called "buy rates") instead of interest rates attached, although you can convert these into interest rates with a simple calculation. Factor rates are similar to what you'd see with a merchant cash advance.
Also, short-term loans often have looser qualification requirements, given the relatively high cost of the loan and the daily payment structure. Because they're flexible and require less paperwork, short-term loans can get processed very quickly, making them a popular choice for businesses with immediate capital needs. But remember, fast cash is expensive cash--you'll be paying for the convenience of speed.
2. LONG-TERM LOANS
Traditional term loans are the most popular form of business lending. The setup is probably familiar: a business borrows a set amount of money under a fixed or variable interest rate, then agrees to pay the loan back over a specific time frame. These loans are flexible, offer predictable payments, and can help improve your business credit.
Term loans from a brick-and-mortar bank often require an extended application process and tend to be slow. This makes them a poor fit for borrowers who need funding quickly. Online longer-term loans, though, are typically processed much faster--in a matter of a day or two, in some cases.
While this speed is a major plus for business owners with pressing capital needs, you should note that you'll need to pay for faster service. Faster service means higher processing costs for the online lender, which then get passed along to the borrower.
3. INVOICE FINANCING
Waiting for customers to make good on their invoices can throw a financial wrench into the operation of a small business--particularly if those customers consistently don't pay on time. Invoice financing addresses this problem by giving you capital upfront for your pending invoices.
This has the benefit of creating a more consistent cash flow, which in turn gives more stability to your business. Invoice financing is also a good option for raising funds quickly, since the processing time tends to be pretty short.
Invoice financing can be an expensive option, though, as you'll now collect only a percentage of your invoices' value instead of everything you charged your customers. You're essentially trading in some of your payments for the convenience of immediate cash. But for short-term needs, it offers a fast, predictable solution.
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The bottom line? When you need a loan fast, make sure you think it through before signing on the dotted line. Businesses with short-term financing needs have a variety of options at their disposal. By evaluating whether your need for financing is truly urgent, then selecting the right financial product, you can be sure to get the best deal.
Just remember that you'll pay extra for speedier funds--and if that makes sense for your business, then pick the right product for your need.
This article was originally published on the Fundera Ledger on May 12, 2016