3 safe short-term finance solutions for businesses

As the UK simultaneously wades through a recession and a cost of living crisis, it’s no surprise that businesses are feeling the crunch. According to Xero, 94% of small businesses faced at least one month of negative cash flow in 2021, with almost a quarter (23%) experiencing more than six months of this. It’s almost inevitable that both of these figures have worsened in 2022, and the issue is only likely to escalate further in the near future.

With so many British companies facing cash flow problems, there may be times where relying on emergency funding is essential. Overall, three in five UK businesses have sought external finance in the last three years, with more than half (54%) doing so to gain more working capital. That said, businesses also seek short-term financing for reasons like investing in goods and services, funding expansion and purchasing fixed assets.

Whatever the purpose, business owners need to know that they can secure money easily and safely, without being saddled with sky high interest on their repayments. We’ve outlined three short-term financing solutions that are not only effective, but safe.

1.   VAT bridging

Businesses don’t always end up paying VAT (unless they’re buying property), as it is a form of indirect consumption tax levied on consumers when they buy goods and services. However, many companies do actually initially pay the tax, before claiming the money back from HMRC. This can leave them with a deficit though, with the government department often taking up to 30 days — and sometimes even longer — to send back the funds.

An effective way of quickly securing the lost money is to rely on something called VAT bridging, which is where you obtain the money you’re owed, and often right away too. As tax credit specialists Adsum explain: “If you need a quick solution to your financial problems, [with VAT bridging] you can access the VAT return that you will be entitled to, but within 24 hours rather than months.”

This can be a simple way of securing funds, though it does rely on your business being VAT registered and having already paid VAT on something.

2.   Short-term business loan

A short-term business loan allows a company to borrow a lump sum of money that’s later paid back over an agreed period of time, typically between a month and a year. It must be used for business purposes, like an investment or buying a new property, and will be processed by a bank or specialist lender.

The main potential drawback of a short-term business loan is the interest rate involved, which is typically around 7% to 14% for small businesses, though bigger businesses can expect much smaller rates. You can also opt for a secured business loan to reduce the interest rate, although this would mean using your assets as security should you default on your loan.

All in all, this is a decent option if you need quick and easy access to working capital, though you need to think carefully about whether a secured or unsecured loan makes most sense for your business.

3.   Line of credit

A line of credit gives you direct access to a pool of funds whenever required, enabling you to quickly withdraw money and repay it when you like up to a pre-agreed limit. Most lenders offer business lines of credit for up to a year, and they must be repaid in full or renewed at the end of this period. Although interest rates can be high, like a credit card or bank overdraft, you’ll only pay this on any outstanding balance.

This option may require some kind of personal guarantee (like a house or a car) if you’re deemed a riskier borrower, which can make it a slightly more unsafe option. More established and bigger businesses will likely be eligible for an unsecured line of credit, however.

Overall, a line of credit works both as a short and medium term type of financing. It can be a great get out of jail free card to have in your back pocket, ensuring that you never have to scramble to access finance at the eleventh hour.