3 Sources of Short Term Financing for Small Businesses - SME Finance

3 Sources of Short Term Financing for Small Businesses

The financial needs of small businesses vary from time to time. Sometimes they need financing over a long period of time to fuel expansion and growth other times they need financing to cover short term needs like day-to-day business operations.

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Short-term finance simply means money required to meet an immediate business need usually not exceeding a year. It also called working capital financing.

When such needs arise small businesses have to be able to know where to look to meet them. Here are 3 major sources of short term finance for small businesses:

  1. Trade/Merchant Credit– This is credit given to the buyer by the seller or merchant. It usually comes in the form of goods purchased without immediate payment. This source of finance does not require any collateral, credit is usually offered on the basis of the existing goodwill and financial relationship between the seller and the buyer. The usual length of trade credit is between 30 – 90 days.
  2. Deferred Income– When small businesses receive income in advance as payment for goods and services they receive credit that can be used to power their daily operations in the short term. This is called Differed income; a situation where a business receives an advance in payment for supply of goods or services in the future. This sort of credit is one of the most important sources of short term finance. Small businesses can demand that customers pay in advance for goods due to its high demand or by providing an incentive for advance payments.
  3. Accounts Receivable Financing – Here a small business uses the debt it is owed as leverage to get short term finance. It can be in the form of invoice discounting where receivable invoices can be sold at a discounted rate to any third party to get finance or the debt can be used as security to get financed.

Sourcing for short term finance can be difficult if you don’t know where to look. So, next time your business has a short term financing need, remember you can ask your seller for credit, leverage your goods to receive payment in advance and use your existing debt to secure the finance you need.

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