The first thing that comes into mind when thinking about a business loan is the more popular, more traditional four to ten-year loans that you can acquire from the banks and credit unions, etc. While it is true that in cases where a long periodic payment is more feasible, a long term business loan will suffice. However, there are many situations in which a short term business can be a better and more viable option. If you are a business owner, there are several reasons where you might be thinking whether or not you should for short term business loans. Small business owners do not need to fret, though, because luckily for them, banks and credit unions are not the only places to look for loans. They now have many loan options at their disposal for a wide variety of loan purposes, including short term ones.
Why Does Loan Purpose Matter So Much?
Would you prefer buying an automobile on a 50-year loan? Probably not, hence in circumstances like these a smaller financial option may be more viable. For example, if you plan on buying equipment and machinery that requires replacement or upgrade from time to time, having a long term business might be detrimental for your finances. It makes no sense to borrow a loan for many years if the assets you tend to acquire, have a much shorter lifetime. So, it is very important to know what type of loan will best serve your purpose.
What Is A Short Term Business Loan?
Short term business loans are for small business owners that want to quickly resolve their financial issues in a short amount of time. Just like any other traditional business loan, you will pay back the entire amount along with the interest rate within the due date, which is usually in a span of 2 to 24 months. It is to bridge the gap between cash-flow. According to an article, 82% of small businesses located in the United States fail because of various issues in cash-flow management.
Types Of Short Term Loans
You can choose from a variety of short term business loans. Each type has its own set of terms and features as well as pros and cons. Here is a brief overview of what you need to know about each type.
- Lines Of Credit
Line of credit is very similar to a business credit card. There is a limit on the credit, and you can access the line of credit according to your needs. Just be wary that you can not exceed the predetermined set limit. Your monthly installments will vary according to how much you borrow. It has a lower Annual Percentage Rate (APR) as compared to business credit cards.
- Payday Loans
These are much easier to obtain. Some people also consider them as short term emergency loans. The only catch is that the entire loan, along with interest needs to be paid in a lump sum when the payday arrives.
- Merchant Cash Advance
As the name suggests, this loan is just a cash advance. The lender has access to the borrower’s credit facility. Each time the borrower makes a sale, the lender takes a certain percentage of it.
- Installment Or Online Loans
It is not that hard to get an installment loan, especially when everything done is online. As soon as you get the approval, the lender will transfer the amount to the borrower’s bank account.
- Invoice Financing
Another name for this type of financing is receivable financing; This allows the borrower to use its unpaid invoices as collateral financing. Learn more about invoice financing here.
Uses Of A Short Term Business Loan
If you are a small business owner suffering from occasional cash flow issues, then a short term business loan may be the solution to your problem. To keep the article precise here are the five most common uses for a short term business loan.
- Startup-Up Costs For A Project
Any new or existing business can avail a short term business loan. If you are an entrepreneur, you can finance the startup costs of your business endeavors by obtaining a short term business loan. From time to time, you will face situations in which the upfront cost required for initiating the project might exceed your ability to cover immediately. Still, after a few months with the help of your invoices, you will be able to pay it off. Short term business loans can give you the advantage of getting in then getting out of a financial situation quickly at lower costs as compared to long term business loans.
- Bridging The Temporary Cash Flow Gap
Short term business loans are ideal if you are dealing with temporary or seasonal cash flow issues. You might need extra cash to deal with the seasonal flux, so you must have a stable cash flow during this period. To make those daunting payments, you can always associate yourself with a short term business loan.
- Availing Time Limited Discounts
Maybe there is a sale on the equipment you need, but you do not have enough resources at the moment. A Short term business loan can be a good way to purchase these inventories at a discount that can make your business profit in the long run.
- Emergency Repairs And Maintenance
Failing of machinery can be catastrophic for your business, especially if repairs and maintenance required to fix them are not cheap. A short term business loan can serve as quick troubleshooting. It can help you in getting operations moving without any long delays or longer loan restrictions.
- Boost Your Business Credit Profile
A Short term business loan is also very helpful to assist a business in creating a stronger business credit profile. If you manage to create a positive credit history by ensuring timely payments, you can greatly boost your business’s credit profile; This can be very beneficial for new businesses as it provides them with opportunities to acquire additional loans later on.
The Bottom Line
Short term business loans can come in handy because of their fast approval rates. You can overcome a crisis by quickly acquiring some funds. While they may have a lot of benefits, there is one catch though, i.e. they usually have high-interest rates. If you feel a short term business loan is going to be profitable in the long run, then, by all means, go for it. Find a trustworthy lender that can help you in deciding what loan is best for you according to your needs.