Short Term Finance

Up to 1 year

Short Term finance is typically used to carry businesses through day to day trading for periods of up 1 year or in the case of an overdraft facility on on-going/revolving bases where cash flow is tight and until future income is received, it is usually referred to as working capital finance.

Due to the short term nature of the finance required and the lower amounts usually involved, it does not usually require the borrower to have any assets such as property to be used as security for the loan.  The borrowing is typically flexible and usually can be renegotiated easily. 

The cost of short term finance will depend on the risk that the provider perceives in lending the money and it not being repaid and as such the cost of short term finance is usually relatively high. For this reason, it is important that a borrower understands the interest rates being charged in relation to other borrowing options and sometimes the interest rate is hidden in the way that it is presented, for example payday loan services which offer short term lending quote the interest in £s as usually the APR being offered are greatly in excess of standard market rates.

Typical short term finance options include:

 

Short Term Finance – Types of finance

Bank overdraft
Nature: A bank overdraft is a form of debt financing and is a flexible borrowing facility on a bank current account which is repayable on demand.
Types: Authorised overdrafts are agreed with the bank in advance whereas unauthorised overdrafts are not agreed up front and as such are more expensive in terms of interest rates and fees.
Length: Typically short term finance for periods up to 12 months which can be reviewed and renewed periodically.
Cost: Charges can consist of fees, daily interest and one-off set-up fees.  The typical arrangement fee will be a percentage of the funds made available for a 12 month agreement. Interest will be charged on the amount borrowed and is calculated daily.  Annual interest rates can differ quite dramatically depending on whether the overdraft is authorised or unauthorised. Unauthorised overdrafts can also attract fees charged at a percentage of the overdrawn balance.
Process: Where an existing banking relationship exists, an overdraft may be agreed relatively quickly as the bank will have the history of your business and income flows.  It is possible that the bank will require a future cash flow projection or some evidence of future income if there is little history held or the overdraft is for a large amount or over a long term.
Finance providers: Retail banks and other financial institutions that offer day-to-day banking facilities

 

Credit Card
Nature: A credit card is a form of debt financing and is a flexible borrowing facility that can allow expenditure up to a set limit and for repayments to be varied on a month by month basis.  Typically used to fund smaller purchases.
Types: A credit card can be issued to an individual personally or on behalf of their business.  A number of cards offer rewards and benefits and provide protection against defective products.
Length: Credit cards are an on-going line of credit.
Cost: Generally the cost of borrowing on a credit card is higher than on overdrafts and outside of special interest rate deals, can be very high and credit cards are typically not suitable for financing the cash flow of a business. Whilst Interest-free periods or low introductory interest rates are available on certain credit cards, the interest rates revert at the end of the period to the standard APR.  Charges are also levied such as annual fees and fees for exceeding credit limits.
Process: An application will be required to obtain a business or personal credit card which will involve disclosing current income and expenditure information in order that the bank can assess and set a credit limit for spending.  A credit check will also be undertaken by the bank in order to assess the suitability of the individual and business applying for the credit card.
Finance providers: Retail banks, retail shops and specialist credit card companies

 

Bank loan
Nature: A bank loan is debt finance that is agreed over a set period, with a set interest rate and a fixed date for either full repayment or  a schedule of dates for the balance to be reduced .
Types: A secured loan is one that is secured on the assets of the business or the individual making the application, such as their property, business assets or personal guarantee.  Should the person borrowing the money fail to repay the loan on time, the lender has the ability to realise the assets secured to repay the loan.  An unsecured loan is a loan where there are no assets or guarantees provided as security.  A fixed loan has a set amount which the borrower borrows at the start of the loan and repays in fixed regular instalments over the length of the loan or in a lump sum at the end of the loan.  A flexible loan sets the maximum amount of borrowing and allows the borrower to drawdown the money as he needs it and makes repayments on an irregular basis with full repayment required at the end of the loan period.
Length: A business bank loan is available typically for periods over 1 year depending on the provider involved, the purpose of the loan and the security taken.
Cost: A business bank loan can attract arrangement fees and security fees in addition to the interest charged on the amount borrowed.  Secured loans are generally cheaper than unsecured loans and business loans tend to be priced individually depending on the circumstances of the borrower and purpose of the loan.  Typically, interest rates are lower than overdrafts and arrangement fees are charged on a percentage of the amount borrowed.  Early repayment charges can apply to bank loans for early settlement of the borrowing owed.
Process: A loan application will need to be made to the bank and they will undertake certain credit reference and credit scoring checks and depending on the level of knowledge the bank has of you and your loan requirements, you may also be asked to supply a business plan, historic accounts, future accounts and details of income and expenditure in the form of a cash flow forecasts.
Finance providers: Retail banks, bespoke lending organisations

 

Trade credit
Nature: Trade credit is a form of debt finance and is an extension to the period that your trade creditors allow you to repay the money that you owe them.
Types: n/a
Length: Credit is typically given for periods between 30 and 180 days.
Cost: Discounts of between 2 and 10% are offered for early settlement of amounts owed and charges can be applied for payment beyond the agreed terms.
Process: Extended credit terms will need to be agreed with the individual suppliers and any cash flow or income information would help establish a sounder basis for any decision that they make.
Finance providers: New and existing suppliers

 

Bridging loan
Nature: A bridging loan is a form of debt finance and is a short-term lending solution until longer-term financing can be established, typically used when purchasing property.  Generally long-term finance such as a mortgage repays the bridging loan.  Bridging loans are typically secured loans that require the provider to take a charge over the borrower’s assets.
Types: Bridging loans are typically fixed repayments over a fixed period subject to early repayment when the longer term finance is secured.  It is possible that monthly repayments can be varied or deferred depending on the conditions of the loan provider.  An open loan is a loan where the repayment is not set whereas a closed loan has a set repayment date.
Length: A bridging loan is usually for short periods up to 3 years.
Cost: Bridging loans are generally more expensive than bank loans as they carry more risk, this can mean higher interest rates and fees.  Interest is charged on the amount borrowed and rates can vary.  Additional fees include arrangement and valuation fees.
Process: An application will need to be made for the bridging loan citing the purpose of the loan, the amount required and repayment date.  Further information will include a valuation of the assets that the loan relates to.  As the loan is secured, information such as business plans and accounts are not typically required.   Note that where the loan takes the form of a first mortgage over your home, both the mortgage provider and any entity that arranges the mortgage must be specifically regulated by the FCA.
Finance providers: Retail banks and specialist bridging loan providers.

 

Invoice financing
Nature: Invoice financing is a form of debt finance which takes the form of a loan against the value of the business’ outstanding customer invoices.
Types: Invoice financing can take two forms either factoring or discounting.  In factoring, the provider will take over the amount owed by the customers, paying the business a percentage of the value of the total amount owed and the invoice financier assumes responsibility for chasing and recovering the debt.  In discounting, the provider provides a loan against the amount of the unpaid invoices, being a percentage of the total amount owed but the business retains the responsibility for chasing the debts and recovering them.
Length: Invoice factoring accelerates the receipt of your customer debts and the repayment of loans under the discounting option depends on the businesses ability to collect the amount due from the customer.
Cost: Under both invoice financing options, interest, arrangement and service fees are charged and the cost is comparable to the cost of an overdraft.   Interest rates and service charges differ and typically charged on funds borrowed or the value of the invoices outstanding.
Process: The application process will involve some element of due diligence where the invoice financier will want to understand the business and the controls in place, test the validity and value of your customer relationships
Finance providers: Banks, building societies and specialists invoice finance providers

Return to top

  • Sponsor Logo
  • Sponsor Logo
  • Sponsor Logo
  • Sponsor Logo
  • Sponsor Logo
  • Sponsor Logo
  • Sponsor Logo
  • Sponsor Logo
  • Sponsor Logo
  • Sponsor Logo
  • Sponsor Logo

Copyright © 2013 UK Music, Savoy Hill House, 7-10 Savoy Hill, London, WC2R 0BU
Tel: Tel: +44 (0)20 3713 8444 Fax: Fax: +44 (0) 20 7306 4449 Email: info@ukmusic.org Twitter: @UK_Music