As a small business finance alternative, short-term loans can cover unforeseen costs, bridge gaps in the company’s cash flow, purchase inventory, or take advantage of new business prospects. It’s not always appropriate to use short-term loans for every business, even though there are a lot of possibilities out there.
Exactly as its name says, a short-term business loan:
Payroll, unforeseen expenses, and other short-term cash flow problems can all be quickly addressed with a short-term business loan. There are short-term business loans with annual percentage rates (APRs) ranging from 3% to 50%. However, the type of financing, the lender, and the creditworthiness of the borrower all have an impact on this.
Financing for a short-term business includes the following sources:
- Based on business criteria, these loans are available to those who qualify. It is necessary to apply for and then repay a business term loan over a predetermined length of time (the term of the loan). Borrowers can’t access their funds until they pay off their loans and accrue interest. If you need a significant chunk of money upfront, such as a down payment on a purchase, this is a fantastic financing option.
- Business credit cards. To use a business credit line, a business owner must have enough money in their bank account to meet all of the company’s costs. Borrowers only pay interest on the money they actually borrow, and once they’ve paid it back, they’re free to spend the rest of their credit line as they see fit. Short-term borrowing is the ideal alternative if you need money immediately.
- Invoice factoring as a business tool. 70-95% of an unpaid invoice’s original value may be sold to a factoring business in the process of invoice factoring. Following receipt of the invoices, the factoring provider will reimburse the business for the remaining invoice balance, less monthly factor expenses ranging from 0.50-3.00 percent.
In order to secure a short-term business loan, what is the process like?
Compared to regular business loans, short-term loans feature a lower interest rate but shorter repayment terms. Between three months and three years, there is a wide range of short-term payback periods in the market. Payback durations for short-term company loans may necessitate greater monthly payments.
Keeping up with the payments on a short-term loan can be more difficult than on a typical installment loan. An example of a refinancing or debt trap is a borrower who keeps renewing a loan while incurring interest. They are more likely to fail because of these features.
When Is a Short-Term Loan Right for Your Business?
A short-term business loan might be helpful or even necessary in a variety of circumstances. A company loan can help if you’re struggling with the following issues:
- Cash flow interruptions Short-term cash flow problems are more common in seasonal industries than in others. During times of low revenue or seasonal slowdowns, a firm may need a short-term loan to keep operations running and personnel paid. Don’t borrow money until you’re sure you can pay it back on time.
- Promising prospects in the foreseeable future for business There are times when quick access to capital is critical to a business’s ability to take advantage of a promising opportunity. Instantaneous funding is available, and approvals are less demanding than with conventional loans. This sort of financing is ideal if the financed opportunity has the potential to enhance revenue or otherwise improve your company’s bottom line.
- To make up for unexpected costs. You can’t always wait till you have enough money to meet expenses before you incur them. Getting a short-term business loan might help your firm cover expenses like building, equipment, or fleet upkeep that were not planned for in advance.
As a general rule, short-term business loans should be avoided when possible.
Short-term loans may be a reasonable alternative if your company is facing unforeseen costs or needs more finances. Those businesses who are unable to pay back the loan funds on time are not the best prospects for this form of lending. Take out a short-term company loan only if none of the following apply:
- Non-payment of a debt. Before taking out a short-term loan to pay for running expenses, thoroughly review the company’s finances and budget. Consider whether the company’s finances and ability to pay will be improved by the loan cash. Before applying for a loan, figure out how much you can afford to pay each month or week.
- In terms of annual percentage rates, these are quite high numbers. As a result, the interest rates on short-term loans may be greater than those on long-term borrowing. In part, this is due to less stringent financial requirements as well as a quicker and easier process for obtaining funds. As a result of a high APR, the overall cost of borrowing can be significantly impacted.
- Payments are made on a monthly basis. Because certain short-term loans have shorter payback terms than ordinary loans, borrowers may not have as much time to repay the money they borrow. The monthly installments will be larger if you pay on a daily, weekly, or bimonthly basis instead of monthly. Don’t take on a short-term loan if your organization can’t make regular, on-time payments.
- Partial repayments that have been amortized When a business loan is amortized, it means that the monthly payments are set out in such a way that the principal and interest on the loan are repaid in full. There may be a final balloon payment on some short-term business loans that are only partially amortized. Failure to pay the balloon by the due date may put the company’s finances at risk.
- Refinancing carries a degree of uncertainty. It is easy for business owners to get behind on loan repayment because of the short repayment durations and big individual payments. Frequently, a short-term loan is refinanced multiple times in an effort to minimize or postpone the amount of money owed. Refinancing a company’s debt might put it in a debt trap even if it can afford the monthly payments.
An Entrepreneur’s Guide to Short-Term Business Loans
Short-term business loans can be obtained in a variety of ways, depending on the type of finance and the lender you select. The following are some general measures to follow if you choose a temporary finance solution.
- Consider your financing needs before making a decision. A short-term loan may be necessary for your business, but you must first identify why. Is it conceivable that the investment would lead to an improvement in productivity or revenue for the company? An upfront payment will do, but would establishing a credit line be preferable? Once you’ve taken all of these things into account, figure out how much money your business needs to borrow and how much cash it already has.
- Obtain a copy of your personal credit report. A business credit rating from D&B, Experian, or Equifax can be useful if you have a well-established company. The borrower’s personal credit score is taken into account when applying for a business loan, as most are personally guaranteed by the borrower. For a short-term company loan, a FICO score of at least 600 is recommended.
- Find the best bargain by doing your research. It’s time to shop around once you’ve decided on the type and amount of short-term finance you need. Contact your bank and ask for information on loans they may have available. To find out how probable it is that you will be approved for a loan, look at the borrower requirements for each lender. Finally, acquire suggestions for lenders by reading online reviews and speaking with others in your field.
- To be considered for this position, you must submit a complete and accurate application. Visit the website of your selected lender or contact a customer service representative to learn more about the official application process. Online loan applications are available at CitrusNorth, although a phone call to a customer service agent may be necessary first. The face-to-face application process is still required by some conventional lenders.
Krystel Shaylee Hudson
Loans Writer at Citrus North | Website
Krystel is a Citrus North personal finance writer. She is a freelance personal finance writer located in Dallas. She is interested in writing about all kinds of personal finance issues such as mortgages, debt or student loans, auto financing, and personal loans. In the past, Krystel worked in search engine optimization (SEO) and affiliate marketing for a major home improvement business. When she’s not working on her computer, Krystel can be found working as a volunteer or trying out new coffee places.