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Short-Term Financing: How Not to Get Ripped Off

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By James Pruitt, Senior Staff Writer

Short-term credit often provides vital sustenance to a new business. Short-term creditors also commonly predate on fresh entrepreneurs.  Regardless of need, business owners should use such lenders cautiously.

“Loan sharks” can suck businesses dry in their times of vulnerability. This stage of the pandemic likely exposes the vulnerabilities of many businesses. Small businesses now likely struggle with debts as well as labor and inventory shortages. Predatory lenders may circle like vultures at this stage.

Are there healthy routes to short term credit? Absolutely. Three outlets can provide safe short-term loans for the cautious small business owner.

Lines of Credit and Online Short-Term Loans

Always beware of unethical practices by creditors. Predatory lenders often exploit smaller business owners with exorbitant Annual Percentage Rates or APRs and crushing terms. Of course, businesses do need a cushion when a crisis arises. This cushion could be hard cash in a savings account or a line of credit from any of a variety of lenders, including mortgagers and small banks.

As discussed in our previous blog posts, cash flow poses issues for many business owners. You need money to make money, right? A trustworthy lender usually asks two things from a small business for a simple line of credit: At least six months in business, and at least $50,000 in annual revenue. Short of these requirements, Veteran Business Owners should give a second look to any lender offering short-term lines of credit. A line of credit may provide the “emergency fund” to protect a business in cases of a short-term crisis.

At a pinch, an online short-term loan may offer a tempting alternative. Direct cash from a lender may provide another “safety net.” However, absent reasonable terms, business owners should look elsewhere before contracting with lenders that seem too eager to dispense short-term capital. Their collections efforts will likely haunt them afterword.

Most online short-term loans have similar terms as lines of credit. A decent credit score tends to hold greater significance when the lender offers hard cash outright. These loans offer further risks, and the lenders use even more caution when approving short-term cash.

These loans can range from four to five digits. However, bear in mind that the payback period can range from three to eighteen months. Creditors will want their money in the meantime. Lenders will also wield greater leverage in negotiations for payment plans and repayment terms. In short, despite the occasional necessity of short-term money, lenders inevitably demand their pound of flesh afterward.

Equipment Loans

These loans are a different sort of animal. Lenders foreclose on the equipment itself in case of default on these loans. Such equipment may include kitchen equipment, warehouse machines, and even company-owned mobile devices. Most lenders expect more security from business owners for such loans, since damage to equipment can greatly decrease its value following repossession.

Trustworthy lenders generally expect eleven months in business, a decent credit score, and $100,000 in annual revenue before securing a necessary piece of equipment. The risk to the lender is greater, so the contractual terms place more responsibility on the borrower.

When to Use a Short-Term Line of Credit?

All businesses (and even individuals) should ideally have an emergency fund. Lines of credit and short-term online loans may plausibly furnish that cushion. Additionally, Veteran Business Owners may lack investment funds during their idea’s development phase. In the case of shorter loans and payment plans, both lenders and borrowers generally should recognize the urgency of repayment. Hence, everyone should apply a fine-tooth comb to short-term financing. Short-term lenders can be as sketchy as they are sometimes necessary.

VAMBOA, the Veterans and Military Business Owners Association hopes that this article has not only been valuable but provided some unique perspective.  We work hard to bring you important, positive, helpful, and timely information and are the “go to” online venue for Veteran and Military Business Owners.  VAMBOA is a non-profit trade association.   We do not charge members any dues or fees and members can also use our seal on their collateral and website.   If you are not yet a member, you can register here:

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Varieties of Cash Flows

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By Debbie Gregory.

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Cash flows in and flows out. Cash flow is important and is a key indicator of a company’s health. As discussed in the previous article, cash flow is different from profitability. Cash flow measures the liquid assets on hand, while profitability relates more to the long-term expansion of the company.

Different types of income and expenses break into different categories of cash flow. We can break these down into (1) “operating cash flow,” (2) “investing cash flow,” (3) “financing cash flow,” and (4) “other cash flow.”

Differentiating types of cash flow helps businesses create a cash flow statement. These statements are important both for internal accounting and tax purposes. Each type of cash flow may require its own equation for records maintenance. These records are important for any company’s operations procedures, regardless of the company’s size.

  • Operating Cash Flow

“Operating cash flow” comes from a variety of sources. On the incoming side of the equation, “operating cash flow” might include the direct cash revenue from goods or services is one such source. Outgoing cash flow might be employees’ wages, purchase of supplies or equipment, utility bills, overhead, or payments on loans. Other types of operating cash flow, besides direct revenue, may include interest on loans and payments from lawsuits. The most common formula for “operating cash flow” is the following: Net Income + non-cash expenses + changes in working capital.

  • Investing Cash Flow

“Investing cash flow” may or may not be relevant depending on the size or operations of the business. Such cash flow may be incoming or outgoing.  Examples may include business acquisitions, insurance settlements, or loans originating from the business or business owner. Generally, the equation from “investing cash flow” is earnings from any investments minus any liabilities, such as loan payments or insurance liabilities.

  • Financing Cash Flow

“Financing cash flow” moves between owners, investors, and creditors. The owners themselves could move cash into the company from their own savings or other income sources. Aside from owners, investors or creditors may contribute to the financing of the company. Investors, for their part, could overlap with creditors, who could issue loans or other financial arrangements.

In consideration of the interests of investors and creditors, owners should consider the appropriateness of moving cash out of the company coffers, depending on circumstances. The most common formula for “financing cash flow” is the following:

Financing Activities Cash Flow = CED – (CD + RP). This formula could help a company issue a cash flow statement.

  • Other Cash Flow

Other types of cash flow might involve charitable contributions, earnings or costs for company events, or any variety of incentives for employees, assuming use for the company’s business purposes. Calculation methods may defer to the owner’s convenience and operations procedures.

  • Cash Flow Statements

The above four categories suggest methods of organization for cash-flow statements, for record-keeping purposes. Companies should issue a cash flow statement at least quarterly. The company’s management may use the above classifications at their discretion.  However, the statements themselves are necessary records for any company’s archives, both for outside requests and internal reference.

We hope that you have enjoyed this article and the prior one on profitability.   We work hard to bring our audience timely and important information.

We do not charge members any dues or fees.  If you are not yet a member of VAMBOA, please join here:

Members may use our seal on their web sites and collateral and will receive special discounts and other important information.