The Best Times to Use Short-Term Loans

Author: Will Cropper, President, Richmond Avenue 11/04/2021

Successful businesses need capital to maintain and grow operations, and that’s where a short-term loan can be helpful. These loans are usually 12 months or less and show up as a short-term liability on a business’ finances. But when is the best time to use one?

Short-Term Operational Costs

Shorter financing is typically used to bridge a gap in cash flow. This is where a short-term loan could help with short-term operational costs, including inventory purchases. For example, a business may sell and ship products. Let’s say it’s a net 30 payout, meaning customers have 30 days to pay for those products. The business has invested money in generating the products—they’ve been sold, shipped, and the funds are due. But in the meantime, the business needs to make payroll and pay its bills.

This is where a short-term loan can come in handy. The business will utilize a short-term loan to meet those cash needs until its customer’s payment is received for the products they’ve sold. Those funds and proceeds can now be used to pay down the loan. Any excess money made from the sales is kept in cash for the business, and this cycle repeats for future products, shipments, and payments.

Other short-term operational costs could be referred to as a “work in progress.” Let’s say the business is a manufacturer, and they purchase raw materials. That becomes “work in progress.” During this time, the business still has to meet payroll and pay utilities, rent, and other costs of doing business. A short-term loan could help with this.

Seasonal Gaps in Accounts Receivable and Payables

Many businesses do the bulk of their sales during a specific time of the year. Think of florists, holiday stores, and even retailers. A florist’s biggest pay day might be Valentine’s Day or Mother’s Day. Fifty percent of their yearly revenue could be made on those days alone. But they still need to carry on operations, pay bills, and make payroll during the rest of the year. A short-term loan can be used to bridge any gaps in cash flow, allowing them to operate and stay on their feet outside of the busy season.

 Other Cash Flow Gaps

Short-term loans can also be used for big ticket items that hit once a year—insurance premiums, property taxes, raw material purchases. Those are items that need to be paid up front. A short-term loan can help.

Short-term loans are often critical to a business for maintaining sufficient cash flow throughout the year. If a business is not sitting on cash, it needs to bridge the gap in some way. Businesses don’t usually fail due to a lack of sales and revenue. They fail because they don’t have adequate cash available to bridge the gaps between the timing of the revenues.

Cash management is a critical component to successful business management. It’s important to have a trusted advisor, like a banker, to help in that regard. If you’re interested in reaching out to a PlainsCapital banker or learning more about which loan might be right for your business, visit our Loans and Financing page. Our SBA lending resources are also available to help you stay on top of your cash flow needs.

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