Short-term business loans are one of many financial tools available to assist fund your operations as a small business owner. To some extent, all businesses depend on funding. Nonetheless, small businesses often have less wiggle room in their bank or accounting balances than larger corporations and are thus much more reliant on financing.
Similarly, knowing how to secure that financing and putting it to best use can make a great difference in whether small business swims or sinks. To that end, entrepreneurs need to understand the disadvantages and advantages of the different types of small business financing choices available. We will look at the benefits of short-term business loans in this article.
What are short-term business loans?
Short-term business loans are a type of business loan that offer cash as a lump sum, and then require repayment over a set period, with interest. These might be available in secured (collateral-needed) or unsecured(no collateral needed) forms, based on the borrower’s lender and qualifications. In general, short-term business financing is primarily used for short-term expenses and needs, with other funding products being a better option for either revolving or ongoing expenses, or for more long-term expenses. There are tradeoffs with short-term business loans, as will all types of small business financing.
What are the pros of short-term business loans?
The main advantages of short-term small business loans include:
Short-term business loans can offer much-needed finances for small businesses at a lower net cost than many other options. Whereas the stated short-term business loan interest rates can be higher than the rates for longer-term loans, that do not tell the whole story. Often, interest rates are stated on an annual percentage rate basis. For a business loan that lasts less than a year, the cost of borrowing will not be as much as the yearly interest rate would make it appear. A loan providing a 20-percent APR but lasting for only six months would, in effect, have a real APR of ten-percent. Since short-term small business loans are repaid faster than longer-term loans, and lending institutions get their finance back quicker, they can often cost businesses less than longer-term loan options.
You should receive your loan faster
The most obvious advantage of a short-term business loan is that it can offer you fast capital for your operations. Besides, a short-term business loan application is generally shorter than that of a traditional bank loan and needs less information. This can be incredibly beneficial if your business has due expenses in the immediate future, and you can not afford to wait on a long approval process.
Smaller repayment installments
Even though repayments are more frequent with a short-term small business loan than with its longer-term counterparts, the repayment installments themselves are typically much smaller. For companies that operate with high cash flow daily, this can make it much easier to manage the repayment of a short-term business loan than some of the other types of available loans.
Improve issues with cash flow
We experience slow seasons to even the best of us. During these periods, small businesses run the risk of shutting down. Careful planning can sometimes be useful in these cases; however, that is not enough; short term loans can help. Use the money to pay off supplier bills and other operational costs. Besides, this can keep you from running up the credit cards while waiting for things to pick back up. In the event your slow season is right around tax time, you can use the short term loan to pay what you owe; that way, you will not get in trouble with the IRS.
The application process is easy
The application procedure for a short-term business loan is fast. Besides, it will possibly be easy to complete. These loans require comparatively less paperwork, and the applications can often be completed online.
Easy to qualify for
When compared to more traditional business funding options, most short-term business loans have remarkably high approval ratings. Even though your business has a limited or poor credit report, you are still very likely to be eligible for a short-term loan. The lender will still most possibly want to assess your business credit and personal credit scores; however, their requirements will probably not be as stringent.
Keep up with seasonal trends
Businesses that experience a hike in sales activity during seasonal periods know the financial challenges they run into. Trying to keep up with the Joneses needs you to purchase more inventory and hire more employees. Or else, your business might not meet the expectations of the market. This can, in turn, result in a loss of revenue since your clients head over to your competition. So to prevent this from happening, you require additional capital. Short term loans are the best solution for this case. Use it to fund temporary workers’ salaries and to prepare for the holiday rush.
Expand your business
Typically, there comes a time when a small business owner wants to expand. A few ways to do so incorporate acquiring a larger building, opening up new locations, or buying additional warehouses to hold inventory. The expenses linked with expansion are extensive, based on how you are trying to go about it. Whatever intentions you have for your growth, you possibly need additional financing. The capital you obtain from a short-term loan can give you leeway to buy what you require without worry. The terms on short term loans are usually reasonable, providing you enough time to repay it.
Improve your credit rating
All companies have a credit rating. By taking out lines of credits and loans, you are helping to build up your credit history. Note that you have to pay these on time to ensure your credit rating is on point. Now, the best part about short term loans is that they give your credit score a boost. This can be useful in getting longer-term loans and large lines of credit in the future. Small businesses often struggle with obtaining these because of a lack of good credit. Then after you repay your short-term loan, you can reapply in the future and probably get a larger line of credit.
It is a short-term debt
Having a long-term debt is never a good idea, mainly when things are shaky with your company. Short-term business loans’ beauty is that they are usually between one month and eighteen months in length. Most companies can manage these terms with ease. Knowing you are not committing a debt that takes forever to repay offers business owners peace of mind. Besides, the great thing about short term debts is that they have a lesser risk of default. The longer you owe money, the higher the probability of you running into financial issues that make it hard to make timely payments. So it is simpler to plan ahead your monthly payments for the short duration of this loan. It is hard to estimate where your funds will be in the far future.
Take care of emergencies
Even the best planner can not plan for emergencies. These pop up out of nowhere and are devastating on the business front. Thus, the best way to prepare for emergency cases is to have insurance. Short term loans are exceptional kinds of insurance because they are faster to obtain. And in most situations, you can get as little as $5,000 and up to $150,000. This offers plenty of room to get the funding required to take care of whatever emergencies life throws your way. Some of the business emergencies you can use a business loan include equipment breakdowns and natural disasters and computer crashes.
Analyzing the advantages of short term loans
Now that you have gone over the benefits of short term loans, it is time to decide if it is right for you. If your business needs fast money, then this can be right for you. You will not need any collateral to get accepted for a short-term loan. With long-term investments, it is hard to get funded without having valuable assets. And who needs to put their company assets on the line, anyway? This way, you can get the funds you require with less risk.
Then in some situations, you might be able to repay your loan faster. Some lenders provide short term loans and do not penalize you for paying your loan in full before the term ends.
Generally, there is a lot for you to mull over; however, the pros far outweigh the cons. While at it, do not forget that it is never a good idea to take out a short-term business loan- or any loan, for that matter- without first consulting a trusted financial advisor. An experienced accounting and tax partner can help you evaluate your options and determine if a loan is right for your business or a better financing option out there.