How to manage cash flow in Q4: Short-term loans vs. invoice finance

For many businesses, the last quarter of the year is crucial. Both Black Friday and Christmas present opportunistic calendar dates when customers are primed to spend, often generating a big chunk of a company’s annual total revenue during this time. 

But Q4 can also be expensive. Buying more stock or hiring temporary staff to help meet demand at your busiest time of year, increased energy bills in darker, colder months, and rewarding staff in the shape of the annual Christmas party or bonuses can all hit cash flow hard. And then there’s quarterly tax payments or year-end tax liabilities to contend with. It’s perhaps no surprise to learn that data tells us lending to UK SMEs increased by 8% in Q4 in 2024. 

Short-term loans allow businesses to plug a finance gap when funds are needed for unexpected expenses or if a business opportunity presents itself. An alternative solution is invoice finance, where you can borrow money against the value of customer invoices that haven’t been paid, whether that’s due to late payment or longer payment terms.

In this article, we’ll explain the difference between these two types of finance and explore how they can bolster your business when your cash flow is stretched. 

Key points:

• Short-term business loans can be useful when quick finance is needed to cover unexpected expenses or to take advantage of unexpected business opportunities

• Invoice finance is helpful for businesses consistently held back by the late payment of their invoices

• Funding Options by Tide can help when optimisation of working capital isn’t enough, offering access to business finance up to £20 million

What is a short-term business loan?

A short-term business loan is a way of borrowing money for a short period of time. Typically, you’ll need to repay the amount within one year or less. These types of loans can be useful in helping companies address immediate cash flow needs or cover unexpected expenses. They’re also useful for companies looking to take advantage of quick business opportunities, such as financing a marketing campaign during particularly busy periods or acquiring stock that’s discounted for a limited time.

The application and approval process is generally quicker than long-term loans, often taking days rather than weeks. This is partly because many lenders require less paperwork and financial documentation compared to traditional long-term loans. But because of the shorter repayment period and perceived higher risk, short-term business loans typically have higher interest rates than long-term financing (although they’re still usually lower than unsecured loans).

Unexpected challenges always come up when you’re running a business. For example, your supply chains could get overwhelmed during busy periods, forcing you to pay extra for rush deliveries or use pricier suppliers short-term. Or equipment might break down and need repairs. Or invoices may not be paid on time. In these situations, your business could need a cash flow loan to make sure you have the finance in place to keep operations running smoothly.

The main advantage of a short-term business loan is quick access to capital when businesses need it most. The trade-off is higher costs and the pressure of faster repayment schedules.

How invoice finance works for seasonal businesses

With invoice finance, you can avoid waiting up to 90 days for customers to settle their invoices, giving you better cash flow management. When you issue an invoice, a finance provider will typically advance you up to 90% of the invoice amount within a few days. Then when your client pays the invoice, you receive the balance, minus any fees. It means you don’t have to wait around for your cash flow situation to improve before making financial decisions.

Here’s why it works well for seasonal businesses:

• No fixed monthly payments: Unlike loans with fixed monthly payments that continue year-round, invoice finance costs are tied directly to your sales activity, making it more manageable during slow periods.

• Matches revenue cycles: Invoice finance provides funding only when you actually have sales and invoices, so you're not paying for unused credit during slow seasons. This aligns perfectly with seasonal revenue patterns.

• Scales with business volume: During peak seasons when you have more invoices, you can access more funding. During off-seasons with fewer invoices, your funding costs naturally decrease since you're using less.

• Supports growth spurts: When seasonal demand spikes, businesses need cash quickly to fulfill orders, buy inventory, and hire temporary staff. Invoice finance provides this flexibility without the lengthy approval process of traditional loans.

Is a short-term loan or invoice finance more suitable for your business?

Faced with deciding between these two different types of finance, how do you decide which one is right for your business?

The first thing to consider is how your invoices affect your cash flow. Do you have customers that consistently pay late, holding back the business growth you think you can achieve? Particularly if you’re consistently experiencing gaps in your working capital, invoice finance will be an attractive option.

Short-term loans may work best for businesses with predictable cash flow who need temporary financing to smooth out operations or capitalise on immediate opportunities.

Both these kinds of finance have the advantage of being able to access funds quicker than other types, such as a revolving credit facility, which takes longer to arrange and requires more collateral. Typically, they don’t require any collateral.

Case study: SME preparing for Christmas stock order

Imagine you run a seasonal business where most of your revenue comes during the months before Christmas, but you need to invest heavily upfront buying stock to prepare for that busy period. You're facing the classic cash flow challenge: suppliers want payment now, but your customers won't pay their invoices for another month or two.

Both the finance options we’ve looked at could help. Invoice finance lets you unlock the cash tied up in your unpaid invoices immediately, turning those receivables into working capital within days. Alternatively, a short-term business loan provides a lump sum you can use for any business purpose, with fixed repayment terms typically lasting under a year.

Some businesses find that the best solution combines both approaches. For example, you could use invoice finance to access money that's already owed to you, then supplement it with a smaller loan to cover the remaining funding gap. This hybrid approach can cost less than a single large loan and aligns your financing with your actual cash flow patterns, giving you the flexibility to capitalise on your peak season without being weighed down by unnecessary debt during quieter periods.

Find business finance with Funding Options by Tide

Whether you’re looking for a standard business loan, a short-term business loan, or something a little more specialist, like auction finance for property developers, we’re one of the leading names in business finance in the UK, having helped facilitate over £1 billion in finance to more than 20,000 customers.

Checking if you’re eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility won’t. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

Find business finance.

FAQs

How quickly can I get funding?

Invoice finance can often provide funds within 24-48 hours once approved, as it's based on existing invoices. Short-term business loans typically take 3-7 days, though some online lenders can approve and fund within 24 hours.

What’s the minimum amount I can borrow?

This varies by lender, but invoice finance typically starts from around £1,000, while short-term loans often have minimums of £5,000-£10,000.

Do I need perfect credit to qualify?

Not necessarily. Invoice finance decisions are largely based on your customers' creditworthiness rather than yours. Short-term loan requirements vary, but many lenders accept businesses with less-than-perfect credit.

Will my customers know I'm using invoice finance?

It depends on the type of invoice finance you choose. With invoice factoring, customers pay the finance company directly. With invoice discounting, you maintain customer relationships and they may not know you're using finance.

What if my customer doesn't pay their invoice?

This depends on whether you opt for recourse or non-recourse invoice factoring. With recourse, you're responsible if customers don't pay. Non-recourse means the finance company takes the risk, but costs more.

Can I pay off a short-term loan early?

Most lenders allow early repayment, but some may charge early repayment fees. So always check the terms before borrowing.

What can I use a short-term loan for?

You can generally use a short-term loan for any legitimate business purpose, such as working capital, inventory, equipment, marketing, or bridging gaps in cash flow.

Which option is more expensive?

It varies based on your situation. Invoice finance costs are typically 1-5% of invoice value, while short-term loans might charge 6-25% annually. The ‘cheaper’ option depends on how long you need funding and your specific circumstances.

What happens if I can't make repayments on short-term loans?

It’s always better to speak to your lender immediately if you’re in this situation as they can discuss options like payment holidays, extended terms, or restructuring your repayments. Ignoring the issue can result in late fees, penalty rates being applied and your business credit score could be affected.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.