A short term loan can keep you in the black, especially if you’re dealing with late payments or are still in the process of establishing a solid credit history.

Managing your finances are one of the most challenging aspects of getting your startup off the ground. Not only are there seemingly endless amounts of bills to deal with, but every invoice you send out takes up to 30 days to receive. How is a business to thrive with such an extreme cash flow problem?

The receivables problem

There is a reason that accounting has an entire section for receivables – it takes seemingly forever for the payments to hit your bank account. Credit card terminals pay on a net 30 basis, meaning you won’t receive the cash for over 30 days from the time of transaction. On top of that, many of them hold a 15 per cent rolling reserve to protect against chargebacks.

Client invoices need to be printed, mailed, received and returned. Then you still need to wait four business days for the check to clear. The required transaction times required for standardised methods of payment are simply unacceptable to modern businesses. If we could find a way to speed up the rate at which we turn over our invoices, we could speed up the rate at which we grow.

The credit conundrum

As a new business, establishing credit may also be a challenge. Companies that have years of transaction data will have an easier time getting a line of credit. If you are a new business, this will not be as easy for you. Banks that do approve you will request that you sign a personal guarantee for your business loan, and this can put your personal assets at risk.

The solution

Getting a short term loan is the best way to address both of these problems. Anytime you issue a client invoice, what you have done is created a notes receivable. By using this note receivable as collateral for a loan, the lender will be able to disregard your short credit history. A short term loan can lend you the balance of the fund for a small fee. Depending on the balance of the invoice, this may only be a few percentage points. Then you can pay back the loan over time, or on a specific date. On top of this, every single time you utilize a short term loan you are improving your credit history and showing the banks that you use credit responsibly.

Thinking long term

In the future, you may not want to take up a loan for every invoice you write. You will want to either have a float of money in the bank to cover your day to day, or you will want a long term line of credit. Taking out short term loans helps you pay all of your bills on time, and assists you with building positive credit. By demonstrating your companies long term history of meeting all financial obligations, and receiving positive recommendations from your creditors you will make yourself a very attractive lender. Once you have established this positive history, your business will be able to get any type of credit you need.