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Among the biggest problems faced by small business is the management of cash flow. Issues often occur due to unforseen situations such as a downturn in trading or through personal circumstances of the business owner. The demand for prompt payment from creditors, suppliers and employees can often see owners struggling to meet their obligations. If this is an ongoing issue then despite the businesses potential, it will surely fail.
From a borrower’s perspective access to capital for a short period of time can be very useful, especially for property investors or small businesses needing irregular cash-flow support.
The key issue is that unless you have a long term relationship established with a high street bank and can anticipate your cash flow needs ahead of time it is extremely difficult to arrange quick access to funds. Even if it can be organised, most long term lenders will lock a borrower into a fixed term and penalise for early repayment. For most, cash needs are sudden and short-term in nature therefore a more flexible option is necessary.
There are two types of short-term loan, both of which are usually secured against an asset as protection to the lender from loss in the event a borrower cannot repay.
- A Bridging Loan - as the name suggests, it is designed to bridge a gap in time until an alternate funding source is available.
- Line-of-credit loan – this can be drawn down and repaid as often as necessary and with interest and fees paid only when the loan is drawn down.
Both loan types can be useful in any number of situations. Some of the common scenarios include:
· Purchase of a new property when the sale of an existing property has not yet settled.
· Business operators seeking to fill a cash-flow gap when taking on a new account
· Builders and developers seeking to release funds to support development projects.
· Businesses requiring funds to pay urgent debts (such as tax) which can then be repaid to the lender over several months
It should be noted that the role of a short term lender is to ensure they solve a client’s need without causing financial hardship. The need for fast access to funds presents lenders with a number of challenges. The first is to ensure that all money lent is secured, which has to be done in a timely fashion, often with little prior knowledge of the client. It is the aim of short term lenders to provide such flexibility and cost effective support whilst at the same time managing their risk.
In addition to the traditional property secured bridging finance products, Commerce Credit is a nationwide company able to provide smaller bridging loans secured against motor vehicles. These vehicle secured facilities can be very cost effective for loan amounts under 100,000. They are particularly useful for small transport operators seeking options to manage their cash-flow or small business operators without sufficient equity in a property to use as security.
This is just one example of the innovative products being developed for small business owners. Andrew Way, director of Commerce Credit notes that this trend is likely to continue “Many short term lenders have become a great deal more sophisticated in recent years. We see this continuing, as private lenders compete to serve this growing sector of the market.”
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