Short-term credit is frequently misunderstood in the non-banking community. To members of the banking community, short-term credit generally means a loan that needs to be repaid within a year, or it can also mean having a revolving line of credit. While this term is not as widely known in the non-financial world, financial experts in the field, such as Don Gayhardt, have decades of experience in the topic and deal with this topic on a daily basis in their profession.
Short-term credit is significant for some businesses because sometimes their profits don’t come in at the time it is needed to pay off business expenses. Short-term credit can also be used to purchase a large piece of machinery that is all but certain to bring in increased revenue, but businesses don’t have the necessary funds on hand to purchase it. Banks and other large financial institutions understand the complex nature of cash flow timing for businesses and they have designed loans specifically catered to helping businesses work through their cash flow issues so they can pay for their expenses in a consistent manner.
Payroll is probably the most common example of why this type of credit is important. Almost all companies pay their employees on a fixed schedule, which is typically every two weeks or once a month. If your business only bills quarterly, as one example, there could be a cash flow deficiency and your company may need short-term credit in order to pay its employees in a timely manner. Until businesses get well established and have some financial reserves set aside, this type of credit can be incredibly helpful.
Another common example of why short-term credit can be useful is when businesses need to order parts to create their product. Sometimes companies need to buy parts in order to complete their product, and of course, no one gets paid for selling a product until that product is complete. Sometimes banks can award short-term credit to cover these expenses, knowing they will get repaid after the completed products are sold.
Large Capital Expenditures or Acquisitions
Short-term credit can also be used as a short-term loan. Some companies need to invest in a large piece of equipment in order to implement significant efficiencies and/or offer an increase in their level of service. A construction company, for example, might be able to take on additional projects if they purchase an additional excavator. Another example could be a large hotel chain that needs a short-term loan to acquire additional property. Experienced financial executives, like Don Gayhardt, have helped several businesses successfully complete large acquisitions, and know the best type of credit or loan to use for each situation.
Because there is such a wide variety of businesses, short-term credit can mean different things to different businesses. It’s always best to talk to a financial advisor or other business executives to make sure you’re getting the right type of credit for your business. However, if you’re worried that you don’t have enough reserves to purchase necessary equipment or your payments are scheduled to come in two months after payroll is due, short-term credit could be an excellent solution for you.