Your company requires cash as quickly as possible. Today, for example. Perhaps a large order has just arrived, and you lack the essential supplies to fulfill it. Perhaps a significant client payment is late, a tax deadline is coming, or a costly piece of equipment has just broken down.
Perhaps you’re going to launch a new product, expand into a new market, or lease a larger building to accommodate growing client demand. Short-term business loans are more common for small firms than long-term debt funding. Businesses frequently prefer short-term loans over factoring or merchant cash advances, with higher interest rates and terms. An unsecured business line may be much difficult to obtain than this sort of loan. Trade credit is usually the simplest sort of business finance to obtain.
Whatever the case may be, you’re experiencing unanticipated cash flow problems and require immediate money. Is it possible that taking out a short-term company loan is the best option? Here’s what you should know about a short-term financing and the benefits and drawbacks of short-term business loans before you make a decision:
What is the definition of a short-term business loan?
A short-term business loan is money obtained for business purposes from a lender, bank, or another external funding source to promptly repay the debt. Short-term loans are one of the most prevalent ways to fund a firm, especially during its early phases of development.
Short-term loans are often smaller and have higher fixed interest rates than other types of loans. Many short-term loans are deposited in borrowers’ accounts within one or two business days. While other loan kinds may have restrictions on how the money is utilized, short-term loans can be used for nearly any company’s needs.
According to Fundera, the typical short-term company loan is around $20,000. However, the sums can range from a few thousand dollars to a quarter-million dollars or more. The periods are short, ranging from three months to two years, as you might imagine. Expect to pay at least 14 percent in interest.
What Are the Advantages of Taking Out a Short-Term Business Loan?
Predictability and stability:
Like a typical loan, a short-term loan is a reliable, predictable, and uncomplicated way to borrow money. After you’ve been authorized, you’ll be given a lump sum payment. You agree to repay the money, as well as the lender’s fees and interest, over a set period.
Ease of access:
Compared to traditional business loans, short-term loans are easier to apply for, qualify for, and fund. This is partly because they require less documentation, which means less stress for you and faster processing and money if your application is approved.
You can employ short-term loans for almost any company purpose you can think of. You have full access over when, where, and how you spend your money.
One of the key advantages of a short-term loan is its speed. Several alternative lenders advertise cash in hand in as little as one or two days.
No credit, no problem:
Having bad credit isn’t always an impediment to obtaining a short-term loan. This is a major reason business owners with blemishes on their credit histories or limited credit histories prefer short-term loans to alternative types of funding.
What Can Short-Term Financing Do for You?
Short-term loans are frequently utilized to purchase the merchandise for businesses with seasonal sales. A retail store that has to stock up on merchandise for the Christmas season is an example. A company like this might need a short-term loan to acquire inventory well ahead of the holidays, and it won’t be able to return it until after the holidays. That’s an excellent application for a short-term company loan.
Short-term business loans can also be used to raise working capital to cover temporary cash flow shortages, allowing you to make payroll and other obligations. You may be waiting for credit clients to pay their debts. You may also require short-term business loans to pay your bills, such as your accounts payable (what you owe your supplier). You may just require a short-term loan to balance your cash flow, especially if your firm is cyclical.
The difference between Short-Term and Long-Term Loans
Most small business owners look for longer-term loans when looking for financing. However, when deciding between short- and long-term loans, you should examine your needs and aspirations. Before making a decision, consult with a professional who can advise you on the best option for your company.
Short-term loans typically have a payback duration ranging from six months to one year. Long-term loans, on the other hand, can range from one to ten years in length. However, the distinction between these types of loans is less about the term duration and more about how you intend to use the extra funds to expand your business.
A short-term company loan may be the best option if you need money to fund a new opportunity, such as recruiting new workers, purchasing extra goods, ramping up marketing, or taking on a new project. These costs generate short-term revenue, which means you’ll have the cash you need to repay the loan sooner rather than later, rather than paying interest.
On the other hand, long-term business loans are better suited for expenses that will help your company grow, but not immediately. A term loan could be used to finance growth costs such as opening a new location, purchasing real estate, acquiring another company, and other necessary expenses such as building maintenance.
Another issue to consider is the time it takes from application to funding. Because lenders don’t have to do as much research on your company, you may usually get a short-term loan in a shorter amount of time. Long-term loans may take a little longer to qualify for than bank loans, but they are still far faster. When you apply through a reputable marketplace, you can usually expect to receive your funding promptly.