Short term business loans and considerations before taking one out
If you’re a business owner who needs capital for your day-to-day operations, then you likely need a short-term business loan. Whether you’re trying to buy some equipment or take your company to the next level, a loan can help you overcome a financial hurdle.
However, with so many loan options on the market, it can be hard to know which loans are suitable for your business.
Continue reading this article as we’ll discuss everything you need to know about short term business loans and some essential consideration before taking one out.
Short-term business loans: what are they?
As defined, short-term loans refer to a type of business capital loan that provides business owners, like you, fast and easy access to funds to address financial issues. Unlike a traditional business loan, taking out a short-term loan allows you to get the proceeds in a lump-sum payment with a repayment option available within one to two years.
For small businesses or start-ups, which are ineligible for a bank credit line, a short-term business loan can be a valuable option. The proceeds of the loan involve much lower amounts, ranging from $100 to more or less $100,000. Most short-term loans aren’t only applicable to businesses but also for individuals who are in temporary financial hardship.
In addition, below are the characteristics of short-term business loans:
- They’re called as such because of how fast the loan requires to be paid off.
- They can even be paid off within six months to one year, depending on the borrower’s circumstances.
- Some short-term loans don’t actually include a specific due date or payment schedule. That’s because they just let the borrower repay the loan at their own stride.
If you think short-term business loans are the right financial solution for your business, then several lending institutions are there to assist you. For example, if you’re running a business in the United States, you can get short-term loans at Personal Money Network.
Short-term business loans: what are the types?
Again, there are many short-term business loan options to choose from. Each type comes with different terms and conditions, as well as advantages and disadvantages.
To know which loan is the perfect match for your business, here’s what you need to know about each of them:
- Lines of credit – One of the short-term loans you can avail on the market is the business line of credit. It usually comes with long repayment terms.
- Business credit cards – They’re considered as short-term loans since you can make use of your credit card to obtain some funds and repay what you borrowed in full each month.
- Term loans – Another popular type of short-business loan is term loans. Although they may be somewhat similar to traditional bank loans, these loans come with a shorter repayment period.
- Invoice financing – It’s a specialized type of short-term loan. You can apply for this loan if an invoice is sent to a client, but you haven’t received payment. In such a case, your lender will use the invoice as collateral to secure a loan.
- Merchant cash advances – It’s another type of short-term loan whereby your repayment terms are based on your debit and credit cards. In other words, a merchant cash advance refers to an advance you get from your future card sales. Meaning, you’ll only qualify for the loan if you have a stable revenue source.
- Payday loans – These are emergency loans that are easy to obtain. However, when taking out this type of loan, you need to pay the entire loan plus interest in one lump sum upon its maturity. Also, most lenders take out the loan repayments from the bank account of the borrower through a continuous payment authority.
Short-term business loans: how can you qualify?
By now, you already know what short-term business loans are. So, it’s time to familiarise yourself with the necessary qualifications for a short-term loan. Just like any traditional loan financing, you’ll need to submit comprehensive documentation to the lender.
Also, your lender will require you a record of your payment history for other loans you’ve had. These may include your business’ accounts payable and your business’ cash flow history within the last 3-5 years. You also need to prepare your income statement for a specific amount of time if your lender asks for it.
Lastly, your qualifications will help determine whether your application will be unsecured or secured by collateral.
Short-term business loans: what are the things to consider before applying?
Again, there are different types of short-term loans. Thus, it’s great to understand these loan options, including the factors to consider before filling in an application form.
Below are the critical considerations to keep in mind before taking a short-term loan out:
Type of loan
Aside from the list of short-term loans mentioned above, you need to know secured and unsecured loans.
If you want a secured loan, you may be required to mortgage your properties to the lender so you can get the loan at a particular interest rate. On the other hand, choosing an unsecured loan means you have to present a lot of documents, such as bank statements, proof of business, and other papers for verification.
Of course, choosing a lending institution can impact your loan application, particularly your ability to repay the loan amount involved. If you find a reputable lender, you can improve your chances of paying off your debt on time due to the flexible repayment plans and low-interest rates involved.
In some cases, deciding to work with banks may result in paying higher interest rates, which makes it hard for you to clear your loan within a short span of time.
The amount you plan to borrow is something you should always take seriously. It’s a great idea to obtain a particular amount of loan.
Look for a lending institution that allows you to take out as much money as you want after meeting their qualifications. Remember, the more loan you wish to borrow, the more money you need to pay back.
Just like any other loan, your credit standing also plays a significant role in applying for short-term loans. Therefore, before you fill in an application form, be sure you have an excellent personal and business credit score.
To know your credit score, speak to a tax consultant. They can help you assess your credit score. Also, it’s worth remembering that a high credit score helps you obtain the lowest interest rate for your loan.
When applying for a short-term loan, you have to pay attention to the interest rates involved. These are essential in computing the total loan amount that you should payback. To get the best deal, it may be best to shop around.
Make sure there are no hidden fees included in the rate since they may only cause the interest rates to increase. In this case, it may be a better decision to take out a loan with a higher interest rate instead of paying expensive monthly fees.
Terms and conditions
It’s always important to read and understand the terms and conditions provided in the loan agreement. This is to ensure you’ll not walk into any financial trap later on.
If you find the deal as too good to be true, you should make a real effort to review the entire loan contract. If you’re unsure about anything, contact a professional to explain the matter before making a decision.
Length of the loan
Since there are different types of short-term loans, it’s crucial to consider the length of the loan to determine your total loan costs. Be sure to discuss your options with the lender you’re considering.
Short-term business loans: benefits of taking one out
With all that said, all short-term business loans come with great benefits. To ensure you make the right decision in taking one out, let’s take a look at some of the general perks of short-term loans:
- Quick funding time – Short-term business loans have quick funding time compared to long-term loans. Because of their shorter maturity dates, they’re less risky, and you can get the funds in the fastest time possible.
- Easy to qualify – Another benefit of getting a short-term loan is the fact that they’re much easier to qualify for. Although every lender has different qualification requirements, you and your business have access to some types of loans depending on the qualifications you have.
- Short time for incurring interests – As the name suggests, short-term loans come with shorter time for incurring interests. Unlike the long-term loans, the interest rates you pay on short-term loans are substantially less.
- New opportunities for growth – There can be several situations where a short-term loan can be ideal for your business. For instance, you may have a large order from a client, but you need quick cash to pay your supplier. In such a case, a short-term loan ensures you’ll get the deal and other opportunities for growth of your business.
There you have it. These are all the things you need to learn about short-term business loans. If you’re running a business, they may provide a great way to address unexpected cash flow issues.
If you’re planning to get a loan anytime soon, we hope you find this article useful when deciding whether a short-term business loan is the best funding option for your growing business.