Short-term loans for businesses might be a good option when sudden cash flow is needed or when one wants to maximize growth opportunities. Knowing under which circumstances one should opt for this type of financing can help you make better decisions regarding the present state of your business and its financial future.
In this article, we cover what short-term loans for businesses are, the length of time they generally last, the types of short-term loans, their workings, and whether they will suit your type of business.
What are short-term loans for business?
Short-term loans for business are those loans that are given to meet the temporary or immediate borrowing requirements of a business entity. Unlike conventional long-term loans, extending even for a couple of years, repayment on short-term loans is typically made within a few months to a couple of years.
These loans are generally taken by businesses to bridge low cash flow, make unaffordable emergency expenditures, finance for equipment, inventory or take advantage of a time-sensitive opportunity. As the duration of a loan is shorter, it is likely to require payments at a more frequent interval, possibly in weeks and even daily.
How Long Is a Short-Term Business Loan?
A short-term business loan usually has a repayment period ranging from 3 months to 18 months. However, in some cases, it may go up to two years; otherwise, if extended, the loan category is classified as either a medium- or long-term loan.
It has a comparatively shorter repayment time frame, which means quicker access to funds and quicker repayment terms. Management of cash flow by businesses will be mandatory for meeting the payment requirements.
How does a short-term loan for a small business work?
Getting short-term loans for business is more straightforward and much faster than acquiring long-term financing. This is what it mainly consists of:
Application: You provide an application, usually online, with your basic business info, financial statements, and credit history.
Approval: If you do qualify, approval can happen within 24 to 48 hours. Lenders usually expedite the underwriting process for loans because smaller amounts are borrowed for shorter periods.
Funding: Once approved, the funds are sometimes distributed on the same day.
Repayment: Repayments might be daily, weekly, or monthly, depending on the terms from lender to lender. Some lenders make payments by automatically withdrawing the money from your business bank account.
Thus, the effective interest cost seems lower since the repayment terms are shorter, but short-term business loans generally cost more in annual terms than conventional long-term loans.
Advantages of short-term loans for business
There are various benefits of choosing a short-term loan for small businesses:
Quick Funding: Fast access to money in business situations is key for emergencies.
Flexible Use: Cash can easily be used for anything from inventory purchases to repairs to payroll.
Builds Credit: Successfully paying off a short-term loan will improve your business credit score, which could make better financing available in the future.
Less Risky than Long-Term Debt: The debt does not hang over the business for years since the obligation is short-term.
Disadvantages of short-term loan for a small business
Higher Interest Rates: Lenders usually charge higher rates to offset the short-term repayment period.
Frequent Payments: Daily or weekly payments could pressure cash flow if not managed carefully.
It is best to consider the pros and cons of obtaining a short-term loan for a startup or existing business before making the decision.
When to consider short-term loans for business?
Short-term loans are to be favoured by businesses in cases like:
Managing Seasonality in Sales: Businesses like retail shops or travel agents experiencing seasonality might want to borrow during the low months so that they can maintain expenses when trading is slow.
Immediate Opportunity: A short-term loan is useful when you are lucky enough to score discounted merchandise or make a time-sensitive marketing campaign investment.
Unexpected Expenditure: You’ll cover the costs of repairs in emergencies. Staffing needs tend to crop up without warning, and equipment might break down out of the blue.
Improving Cash Flow: Keep your cash flow in sync by remediating gaps while you wait for your customers to pay or your big project to close.
In all those instances, the high cost of borrowing is compensated by the fast disbursement of loan facilities.
Final Word
Short-term loans for business purposes are a flexible and fast way to finance a business that requires cash on hand. They currently have several benefits, including immediate approval and flexible use of funds; however, they should always be carefully studied, as they come with much higher interest rates and require frequent instalments.
This explanation helps you understand how a short-term loan for a small business works, when to use it, and what impact it has on your cash flow. Whether you are running a growing company or need a short-term loan for a startup, this type of financing can be a valuable tool when used wisely.
