Fundera.com defines Short Term Loan as loans that “are designed to meet short-term financing needs. They can be a flexible financial tool to better manage cash flow, deal with unexpected needs for extra cash, or take advantage of an unforeseen business opportunity.”
The Financial Dictionary defines Short Term Loan as “Any loan that must be repaid or refinanced within one year. Short-term loans are recorded on a balance sheet as current liabilities“
Short Term Loan (STL) are used by businesses to finance short term financial gap in business cash flow and are expected to be paid back within a maximum period of one year. Because of the short tenure of STLs, most bank approve the loan facility without tangible collateral. Hence the attendant higher interest and fees charged by banks of STLs because of the high risk inherent in this type of loan and the need by banks to deploy more resources to monitoring STLs.
Banks solely depends on the competencies of the customer to utilize the loan facility as agreed and return it on due date and the reputation of the customer’s business partner/s (Principal) to make payment to the customers account with the bank as promised.
For bank customer to enjoy STLs, he must have developed competencies to deliver of a job order or contracts awarded to him with proofs in the form past job done. The Organization (Principal) that awarded the contract or gave the job order must also be seen as a reputable entity that will make payment directly to the customer bank account when the customer has fulfill his own part of the agreement by executing the job in line with expectations.
The contractor may not need to provide additional collateral to the bank depending on the tenure of the facility, the competency of the contractor and the reputation of the organization that gave the job order.
Most bank will grant a loan not more than 70% of the cost of executing the job or invoices value to the customer while the customer is expected to fund 30% of the cost.
Here are short term loans available to small businesses
1.LPO Finance Facility
LPO Finance is provided to customers who have been awarded a job order by a reputable company to supply items to the company. LPO, meaning Local Purchase Order is granted to contractors of organizations to supply items for use. The contractors may have gone through screening and have been trusted to having abilities deliver such jobs.
Such contractors without adequate financial ability to get the job executed may approach their bank for finance. The bank in turns confirms the genuine of the job order, the ability of the contractor to execute the job and the reputation of the organization that gave the job order to honor payment obligations when due.
2.Invoice Discounting Facility – IDF
This type of Short Term Loan is granted to contractors or suppliers of organization that have delivered on the job order and are waiting to be paid. The average payment period for most organization after delivery of job orders ranges from between 30 days to 90 days, during this period the contractor may have been awarded other job orders or may have need for fund. Such contractor can approach the bank for IDF.
The bank in turns will verify such invoices and the willingness of the organization to pay as at when due before discounting the customer’s invoice.
3.Contract Finance Facility
Contract Financing Facility is similar to LPO Finance, the major difference if that while LPO Finance is for strict supply Job, Contract Finance Facility is for finance of jobs that involves value addition before supply is made. Contract Finance is for job orders for construction, production and the likes.
The conditions are about the same with LPO Finance, Contract Finance may have longer tenure because of the value addition activities involved.
It is important to note that the name of these facilities, tenure, your equity contribution and collateral provision may vary from one bank to another. What we have done is to bring out the basic understanding of Short Term Loan available in Nigerian banks.
Read also: Factoring, an invoice discounting option