Every small business owner has been there, you’re hit with an unexpected expense before the next invoice clears, and now you have a cash flow issue. In these moments, a short-term loan can feel like the fastest fix. But high interest rates and fees can make these loans an expensive borrowing option.
Short-term loans from alternative lenders, such as online business loans or merchant cash advances, are fast and may be easier to qualify for than a traditional bank loan. But they often come with a steep price. In addition to high interest rates, there may be fees for origination, early repayment, or missed payments. Before going this route, it’s worth exploring other strategies and lower-cost tools.
Many small businesses wait until the end of the month to invoice clients. Then it’s another 30 days or more, on average, before payment is received. By sending invoices immediately after delivering your product or service, you can try to shorten the cash cycle.
Using invoicing software that allows you to send automated reminders can help you follow up with clients to avoid late payments.
A credit card grace period is the amount of time between your statement closing date and your payment due date. During this window, no interest is charged on new purchases. All federally regulated financial institutions have to provide a minimum 21-day grace period.1
To highlight how it works, let’s look at an example. Say you own a bakery and your oven suddenly breaks down. You’re waiting on a big client to pay their invoice in the next two weeks, and you currently don’t have enough cash to cover the $2,000 repair cost.
To help fill in the gaps, you turn to your business credit card to cover the repair cost. Depending on when you make the charge in your billing cycle, you may have up to 51 days (21-day grace period, plus an average of 30 days per month) during which no interest is charged.
When your client pays their invoice in two weeks, you use that money to pay off your balance in full, and you don’t need to pay any interest.
Alternatively, if you took out a short-term, high-interest loan, you would start paying interest immediately, with no grace period.
If you use a credit card as a short-term solution to your cash flow issue, the goal is to pay your balance in full to avoid interest. But sometimes that’s not possible. Maybe a client pays a few weeks late, and you have to carry a balance.
In this case, having a low-interest business credit card can help you reduce what you owe while you work to clear the balance.
While a standard business credit card typically charges around 20%, a low interest card may offer rates of 13% or lower. For example, if you carry the $2,000 repair charge on your credit card for a month, with a 20% interest rate, you’ll pay approximately $33 in interest. With the same balance on a low-rate card at 13%, you’ll pay approximately $22 in interest. You’ll save around $11 for one month, and if you carry your balance for multiple months, that can add up quickly.
Another way to support short-term cash flow issues is with a business line of credit. Like a credit card, you have immediate access to funds when you need them, up to your credit limit. You can pay off your balance as soon as you have the money available. Unlike a business loan, you only pay interest on the amount you borrow. If you can pay your balance in full, you can save on interest.
If you encounter a similar cash flow issue down the road, there’s no need to reapply. You can draw on your line of credit again as needed.
Rather than reacting to a short-term cash flow issue, you can prepare by creating a business cash reserve. This doesn’t have to be huge; you can aim to save enough to cover a month or two of fixed operational costs.
Hold this money in a separate savings account so you’re not tempted to use it for other purposes. To make the most of your money, you can put it in a high-interest savings account.
Don’t wait until your business needs money to start planning for short-term gaps in cash flow. Establishing a cash reserve is an effective way to prepare for these moments. If you don’t have business savings, you can avoid paying high interest rates on short-term loans by using a low-interest business credit card strategically. You can take advantage of the grace period to avoid interest charges, but make sure you have a plan in place to pay your balance in full.
Media Contact Information
Name: Sonakshi Murze
Job Title: Manager
Email: sonakshi.murze@iquanti.com
