What Are Short Term Business Loans?
Short term business loans are a type of credit offered to the borrower in lump-sum and repaid within a particular period at a specified interest rate. What qualifies the loan to be referred to short is the repayment period.
Usually, the term for this type of product can vary from some months to some years. Small entrepreneurs find a short term loan appropriate when their business needs don’t require a significant credit.
Everything You Need to Know About Short Term Business Loans
If you are experiencing cash flow problems, and you don’t have money to meet unexpected expenses or finance a short term investment, then a short term business loan is an ideal solution to your situation.
Areas Where You Can Use Short Term Business Loans
The following is a description of the areas where you can use your short term business loans
Managing cash flows
Cash flows are essential aspects when it comes to the management of your business activities. Sometimes, your business may experience problems to the extent that you are not able to generate adequate revenues.
Also, your customers may delay paying their debts because of circumstances. In such situations, the best option is to get a short term business loan to bail you out.
Inventory is an essential component in your business operations. A number of small businesses lose their customers when they fail to maintain their stocks at optimal levels.
Having adequate goods means that your business will go on uninterrupted, and your revenues will steadily grow. In case you don’t have sufficient funds to replenish your merchandise, then go for a short term business loan.
Hiring staff for seasonal help
Some businesses perform differently based on the annual seasons. For instance, if you are in the hospitality industry, you are likely to make more sales when many people are on vacation, especially during the December holidays. Therefore, during such a time, you will need a short term business loan to hire more workers to help you.
Running a business involves a lot of aspects. It is vital to note that the equipment and the premises you use to carry out your activities may be damaged accidentally. Such breakdowns can bring your business to a standstill. Therefore, in such a scenario, the best thing you can do is to get a short term loan to help you repair the affected asset.
Marketing is one of the significant events when it comes to the management of your business.
It is vital to note no company can boost its revenues without advertising or promoting its products. It is essential to bear in mind that marketing is a costly affair, and in case you don’t have adequate funds to finance it, and it is advisable to opt for a short term business loan.
Business credit score
A business credit score is an essential parameter that lenders consider before advancing you money. A credit score rises as you borrow funds and pay them promptly. Therefore, through a short term business loan, you can build an excellent credit score.
Differences between Short Term Loans and Long term Loans
It is vital to note that both short and long term loans are term loans. The following is a highlight of the differences between the two.
Short term loans are meant to cater to immediate business needs, and a small amount of money characterizes them. However, long term loans require a vast amount of funds to provide for significant investments.
Since short term loans deal with a small amount of cash, their repayment period is usually up to one year. On the contrary, long term loans are meant to cater to huge capital investments, and, therefore, they have an extended repayment period that ranges between 1-20 years.
Since long term loans are paid over an extended period, they have lower interest rates than short term loans.
What are the Pros of a Short Term Business Loan?
Short term loans are ideal solutions for your immediate business needs. The following is a highlight of some of the advantages of this facility.
Ease of access
Unlike traditional loans, short term loans are easier to apply for because they require a few conditions. Also, note that these loans are quickly approved, and money is made available in your account within a short time.
Credit score isn’t a mandatory requirement
Note that a credit score is not a must requirement for your loan approval. You need to bear in mind that some lenders are willing to fund you despite your low credit score.
Speed of execution
Short term business loans take a short time to get approved. In case you need urgent cash for your unexpected expenses, then go for a short term business loan. Usually, the loan process, from application to disbursement, can take less than two days.
Predictability in repayment
A short term business loan encompasses lump-sum cash that is given to you upfront to be repaid with interest over a predetermined duration.
Note that you can use a short term business loan to fund any needs in your business. Unlike equipment financing, a short term business loan is not tied to any particular purpose, and, therefore, you are free to use it the way you want.
The Down Sides of Short Term Loans
The following are the cons of short term loans.
The annual percentage rate for a short term loan is higher than that for a long term loan.
Need for more frequent payments
Sometimes, lenders may require that you make payments weekly as opposed to monthly. The frequency of these payments can be a challenge if you don’t generate consistent revenues.
Short term business loans are easier to acquire, but their repayments may be a challenge due to financial constraints. Therefore, if you experience such a situation, you may be tempted to borrow another loan to finance the older one, hence putting yourself in financial difficulties.
Short term loans can’t solve all your problems
It is vital to note that short term loans can’t sort out all your financial challenges. Therefore, you need to manage your business activities well to achieve maximum performance.
Limited repayment time
Short term loans are paid back over a short time. Sometimes, you may face challenges in repayment, especially when you have inadequate cash flows. Also, note that with a short repayment period, you are likely to pay a higher monthly installment, hence leaving you with insufficient funds.
Penalties for late repayment
Sometimes, your business may fail to generate adequate revenues as expected. In such a scenario, you may fail to pay your loan on time, hence getting penalized for your lateness.
Qualifications for Short Term Loans
For short term loans, any business person with steady sales can qualify for them. Short term loans are easier to get, and they can help you with immediate cash for your business needs. Usually, the requirements for a short term loan include a credit score, cash flows, business experience, bank statements, and financial statements.
Note that you can also acquire your short term loans through alternative business financing, such as online lenders. Therefore, this implies that you can get funded even when you have less than three years of experience, inadequate revenues, low credit score, and insufficient documents.
How to apply for a Small Business term Loan?
For you to apply for a small business term loan, you must fill in the loan application form with crucial details. The following is a highlight of some of the particulars needed while filling up the form.
Your personal information is vital as it makes the lender know you. Personal details include your full name, social security number, physical and postal addresses, email address, telephone number, marital status, date of birth, and many more.
Business details entail the name of your business, the location, web address, business number, and registration date.
Age of the business
The age of business refers to the time your company has been in operation. Lenders require this information to gauge the level of your business experience.
Business bank statements
These documents are vital, and they are used to evaluate the business relationship you have been having with your bankers.
Business landlord information/mortgage information
Informs the lender about the amount of rent you pay for your business premises.
For your loan to be approved, you must let the lender understand the kind of business activities you are engaged in.
Types of Short Term Business Loans
There are different types of short term business loans, as explained below.
These are business loans with a short repayment period. It is vital to note that you might not get these facilities from traditional lenders, but you can acquire them from online financiers.
The interest rate charged on this product varies from lender to lender, and usually, it is 1%-99%.
Lines of credit
A business line of credit can be available either on a short term or a long term basis. If you want a line of credit for a short duration, then online lenders are ideal for you.
Vendor credit refers to a business contract you enter with your vendors to pay for products or services within a particular time instead of doing it using cash on delivery.
With vendor credit, you may be allowed to make payments between 30-60 days.
Note that vendor credit is an excellent way of managing your cash flow, and it doesn’t involve any interest payment. With this arrangement, you are likely to get a discount if you settle your debt early.
Invoice financing is an ideal option of getting funds when your customers delay paying their debts. Note that with invoice financing, lenders give you a particular proportion (between 80%-90%) of the invoice amount. After that, you then undertake to collect the invoices from your customers. Note that you are supposed to pay this debt, together with interest, at the end of a specified period.
Merchant cash advances
A merchant cash advance is a fund given to you based on your cash flows to be paid from your future credit and debit card sales. Although a merchant cash advance is easier to qualify for, they are costly because of high-interest rates that range from 20%-100%. As an entrepreneur, it is advisable to consider a merchant cash advance as your last option when it comes to short term financing.
Business credit cards
Business credit cards are a form of short term business loans that can help you meet your business requirements. With business credit cards, you can pay for your business expenses and then repay your credit every month.
The interest rate for business credit cards is usually up to 20%. Moreover, note that some business credit card providers offer these products at 0 APR. A zero APR implies that you can be funded to get an interest-free facility.
Can a Business Person Get a Short Term Business Loan with a Bad Credit Score?
It is vital to note that you can get a short term business loan even if your credit score is not satisfactory to your lenders. However, with bad credit, you will have to pay a high-interest rate on your credit.
Can Startups Get Short Term Business Loans?
Most of the traditional lenders, such as banks, don’t offer short term business loans to newly established businesses. However, if you are a startup, it is advisable to opt for a business credit card since it doesn’t require any business experience.
Conclusion on Short Term Business Loans
A short term business loan is a credit facility advanced to an entrepreneur in lump-sum to be repaid within a specified period at an interest. As a business person, not that short term loans are designed to cater to your immediate business needs, such as investing in a new business opportunity, meeting unexpected expenses, and expanding your business.
Short term business loans are ideal solutions for your urgent business requirements because you can easily access them, and their conditions are not severe.