When a business needs external finance for its operations, one of the first options many entrepreneurs think of are traditional bank loans that are payable over five-ten years and have a strict qualification criteria – i.e. those that require your business to be operating for at least two years, have a sound six-figure annual revenue and a credit score of 600 or above. While such long-term loans are suitable for the business’ long-term funding requirements, such as the need to purchase expensive assets or fund expansion plans, there are plenty of situations where a short term business loan is a much better funding option.
What are short term business loans?
A short-term business loan is designed to meet the immediate financing needs of the business. Application is quick with minimum qualification criteria, approval often takes place within a day or two, and the loan is paid back within 12-18 months, eliminating the need for any long-term commitment. You can secure funding up to $500,000, with interest rates typically starting from 10%.
Uses of short term business loans
Short-term business loans can be the ideal financing solution for businesses that are in their growth phase, anticipating a significant increase in sales or those that have fluctuating cash flows. For any scenario where you need funds on an urgent basis that can be repaid in a few months, a short-term loan is hugely beneficial.
Some common uses of short term business loans include:
- Dealing with working capital shortfalls: Every business experiences an occasional slowdown in sales or receivables recovery where it may find itself struggling to pay routine expenses such as salaries, rent, and utilities. Making salary payments on time keeps up employee morale while timely payment of bills helps the business avoid penalties.
- Marketing campaigns: Planning to launch a new marketing campaign that will boost sales but short on funds? A loan can provide the funding needed to get your message across to your target audience.
- Financing emergency repairs: Whether it is a computer crashing or manufacturing equipment breaking down, asset repairs are unexpected – and costly. A short term loan can bail you out and help you get all your necessary repairs done to ensure you continue to operate at full efficiency.
- Preparing for peak season: If your business is a seasonal one, you probably need to build up significant inventory and hire additional staff ahead of peak season to prepare for it. A short term loan can be used for this purpose, and the business can quickly pay it off once income starts coming in.
Advantages of short term business loans
There are many reasons why short term business loans are becoming an increasingly popular financing option for businesses today. Here are some of the benefits they offer:
- Fast processing
Compared to traditional funds, short term loans are processed a lot quicker. Since the eligibility criteria are not as extensive as that for a long term loan, there is little paperwork involved, and most applications can be screened for approval faster. You can receive your funding within two-three days. It is handy for any payments that are urgent and cannot be delayed due to a lengthy loan application process.
- High approval rates
Even for businesses that are relatively new or small in size with little success to their name, short term loans can be obtained easily and quickly compared to others. The lender is still going to review your credit score and business history but is likely to be relatively lenient. Short term loans are known for having high approval rates.
When it comes to short term business loans, there are several financing options to choose from. You can avail of a loan that can be repaid as quickly as three months or one that goes up to 18-24 months. There is also the option to pay it off on a weekly or monthly basis, whichever suits your business. Some loans do not require payments in installments at all – you can pay the full amount along with interest at the end of the term.
- Choice of lenders
Long-term loans are only offered by large institutions such as banks, leaving businesses with limited options. Short term loans, on the other hand, are provided by many sources today, such as online lenders. There are several reliable online platforms where lenders and borrowers come together to negotiate terms and finalize attractive lending solutions.
In 2018 alone, there was a funding gap of $5 trillion between the funding needs of small businesses and the financing offered by banks, which was being met by alternate lenders. There are a lot more opportunities to secure a short term loan at a high rate compared to the limited loan options offered by banks.
- Act as a safety net
Every business faces unexpected threats or finds itself in a state of emergency from time to time due to uncontrollable factors such as changes in the market or the economy. For example, new technology might make specific processes or products obsolete, and the business has no choice but to adapt to the change. A new competitor may enter the market and start stealing market share – the company will have to come up with a more effective marketing campaign quickly to get back on top. All such threats require an emergency fund to deal with them.
In such situations, short term loans act as a safety net and prevent the business from failing. With quick processing time, the company can get fast cash in case of emergencies and ensure its survival.
- Lower interest payment
If you have always thought that short term loans are more costly than long term loans, you could be wrong. Although they do carry at a higher interest rate than other funds, the investment is returned over a much shorter period, and the interest you pay is likely to be lower than for a low-interest longer-term loan. Making fixed interest payments on an investment over a long period is a big commitment that puts a severe burden on the business’ cash flows and profits.
Unexpected cash flow problems are a common problem all businesses must deal with at one point or another. In such situations, having access to quick cash is always beneficial – and this is why short term loans a great option to ensure the financial well-being of your business.