These days there are all sorts of financing options. If you’ve applied and been rejected for a line of credit, the next best option is to consider is a short term loan. These loans can be used for a variety of business purposes and are especially useful when cash flow has slowed. Continue reading to learn about 6 facts you’ll want to know before applying for a short term loan.
- They Really Are Short
Unlike other secured loans that can be paid back in years, a short term loan must be paid back within 12 months. With short term loans, you pay interest on the principal each month. Most of these loans involve smaller sums of cash to keep payments at a reasonable amount. If you’re looking for tens of thousands of dollars, this loan may not be the wisest option. With a short term loan, you want to borrow an amount that you can afford to pay back on a monthly or weekly basis. Otherwise you may risk not paying the loan back in full within the agreed time period.
- They’re Ideal for Short-Term Debt
A short term loan shouldn’t be used to pay certain business expenses. Using this type of loan to pay for long-term debt can set you up for future financial issues. If you’re considering a short term loan, be sure you’re using it for the right expenses. These loans are best for:
- Seasonal trends
- Business expansions
- Cash flow issues
- Start-up costs
- New business opportunity
- Inventory purchases
- Emergency expenses
Using a short term loan for the wrong business expense could be problematic. Not paying a short term loan off in time can negatively impact your business and personal credit history and score. When applying for this type of loan, be very sure you have a clear path for paying it back within the set term.
- Ideal for Startups & Small Businesses
As a start-up or a small business, you’ve likely been turned down for financing in the past. Because larger banks see a lack of history and business income as risks, it’s hard to get approved for a traditional loan. But, not all hope is lost! The process for getting approved for a short term loan is much less stringent. Lenders such as credit unions and local banks often approve entrepreneurs for these loans. You’ll even find there are online lenders that offer this type of loan.
If you’re a startup looking for some initial cash flow or if you’re a small business looking to expand, consider a short term loan.
- Applying is Easy
Knowing how to get a short term loan before applying makes the process a lot easier and quicker. Before applying, be sure that you’ve gathered all of the needed documentation that all lenders will need. When applying, you’ll need to provide your driver’s license, personal tax returns, as well as proof of ownership. A lender will also look for a voided business check, bank statements, and your credit score.
With this information, a lender can determine your business history, health, as well as any risks that may impact your ability to pay back the loan. Lenders will also use this information to determine a loan amount as well as an interest rate. Typically the more money you borrow, the higher the interest rate will be.
- They’re Much Faster Than Traditional Loans
If you’re facing a true cash emergency, you need money as fast as possible. With short term loans, some lenders can provide you the money you need in less than 24 hours, which is why these loans are often called payday loans. Unlike traditional loans that can takes weeks to be reviewed and approved, short term loans have a much quicker turnaround. If you’re facing a desperate situation for cash for your business, this is definitely the loan to apply for.
- Credit Boost
Short term loans not only provide your business the cash it needs, they can also be helpful in boosting your business’ credit score. Because these loans must often be paid back in months, your credit will see quick improvements. An improved credit score and history boosts your chances of getting approved for larger traditional loans. Better credit also makes you less risky in the eyes of a lender, which means lower interest rates.
Applying for any type of financing is a serious decision. You want to know that you’re making a wise financial decision for your business now and in the future. With these 6 facts, you know the basic ins and outs of short term loans and can make the best lending decision for your business.