It’s not uncommon for a small business to experience situations where they need additional cash to overcome a temporary cash flow gap. This can be true even for those businesses that set aside a cash flow cushion within their business bank accounts in anticipation of unexpected short-term expenses. In spite of this extra preparation, there are still situations where a business might need the extra capital available via a temporary cash flow loan.
Possible Short-Term Needs Suited for a Temporary Cash Flow Loan
Although this type of financing is not best suited for meeting long-terms needs for capital, there are reasons a business might consider borrowing to meet a short-term cash flow need (provided they have the resources to make the periodic payments. Here are some use cases where a temporary cash flow loan might be a consideration:
- Bridging a seasonal cash flow bump: Many seasonal businesses sometimes require a little extra capital to meet expenses as they move from one season to the other.
- Unexpected need for additional capital: It’s not uncommon for businesses to experience unexpected expenses like a major plumbing problem or other maintenance issue they might not have the cash flow to cover.
- New project start-up costs: Ramping up for a new project or a new customer contract sometimes requires additional resources that might exceed a business’ ability to cover with cash flow, but will be recouped in 60 or 90 days.
- Emergency repairs to business-critical equipment: When equipment necessary to the operation of your business fails, it likely doesn’t make sense to wait several weeks to start repairs. A temporary cash flow loan can be a good way to access capital to start those repairs right away.
- An opportunity to purchase quick-turnaround inventory at a discount: A short-term loan could be a good solution to take advantage of an opportunity to purchase inventory that has the potential to increase profits.
Some Cash Flow Challenges are Really Opportunities
As mentioned above, sometimes the need to access capital quickly could be to take advantage of an unforeseen opportunity to increase profits. For example, responding quickly to the opportunity to purchase inventory at a discount or launch a needed marketing campaign. A temporary cash flow loan probably won’t make sense for every business or business need, but can be beneficial to generally healthy businesses that need access to capital quickly and have the means to repay the loan over a short period of time.
When borrowing short-term capital, you should be aware that the periodic payment will likely be higher than a loan with a longer term, but the overall cost of the interest, fees, and expenses could be lower. The Electronic Transactions Association (ETA) surveyed a group of small businesses and found that when meeting a short-term need, they wanted to minimize the total loan cost to maximize ROI potential. As a result, 57 percent chose a six-month loan with a higher APR over a longer-term loan to minimize total interest costs, fees, and expenses.
Loan purpose, or the business need your trying to meet, is a good way to determine the type of financing that makes sense for your business. Meeting a temporary cash flow need requires a different approach than borrowing to purchase a heavy piece of equipment, expand into a new location or meet some other long-term capital need. The ETA survey respondents also suggest that those small businesses anticipate a 5X return for every $1 borrowed. In other words, they’re leveraging short-term borrowing to take advantage of borrowed capital to increase the ROI in their business.
OnDeck Offers a Potential Short-Term Cash Flow Solution
We understand the cash flow limitations that small business owners sometimes experience, including the unique challenges faced by seasonal businesses. We make temporary cash flow loans that are based upon the overall health of the business rather than solely on the personal creditworthiness of the business owner. An OnDeck loan is not a merchant cash advance, but a small business loan that can be used to meet many cash flow needs.