Funding a startup is no easy task, especially with limited options. Bank loans aren’t always approved for new businesses. You can only lend so much from friends and family members. Government programs for small businesses can take weeks, if not months to complete the process. At the same time, finding the capital you need to increase company inventory or to hire a new employee can also be difficult.
If you need money quickly, you may want to consider a short term loan. These loans can be risky and should be used as a last resort option, but they can be extremely helpful during cash flow emergencies or if you only need to borrow a small amount of money.
Here’s everything you need to know about short-term lending.
What is a Short Term Loan?
A short term loan is a loan that needs to be repaid within a year. These loans are ideal if you need funding to get you through a temporary cash shortage. Short term loans are much easier to get approved for because of the low borrowing amount as well as short life of the loan.
To avoid the perils of short-term lending, it’s crucial that you pay these loans back as quickly as possible. If you’re unable to pay the loan off within the set timeframe, more interest will be applied to the loan, which in the end costs you more money.
Pros & Cons
Before applying for a short term loan, it’s helpful to understand the benefits and drawbacks to this type of lending. Top benefits include:
- Can be used to build and improve your business’ credit history
- Avoid long term debt
- Secure funding quickly
- Suitable for a variety of business expenses
But, with the good comes the bad. One of the biggest drawbacks to short term lending is the higher interest rates. With these loans, lenders have a prime interest rate as well as a premium rate, based on your company’s level of risk.
Lenders may also require more frequent repayment. While most loans require a single monthly payment, a short term lender may require weekly or bi-weekly payments. Making payments more frequently means smaller payments. But, if your company is experiencing uneven sales or a lull in sales, making these payments so often can be problematic.
Because these loans are easy to qualify for, they are tempting for business owners. Increased spending can be problematic, causing potential financial and budget woes.
When to Use a Short Term Loan
A short term loan isn’t the best choice for all business expenses. If you have long term debt to pay off, you may put yourself and your company into a financial bind. Avoid using short term loans to pay off long term debt such as business acquisitions or a real estate purchase.
But, there are a few situations that warrant the use of a short term loan that won’t put you into a financial bind.
Coat companies are more likely to experience higher sales in the winter, just as a company selling all-natural sunscreen is more likely to be booming during the summer. The same stands for companies that are popular around the holidays.
If you’re struggling to keep up with seasonal trends, a short term loan may help. During those peak months, you can use a loan to hire additional staff members as well as to stock your inventory. A short term loan can be used to cover these temporary costs without causing financial hardship.
Cash Flow Woes
As a business owner, you know that business sales are never even. Look at any company’s sales charts and you’ll see peaks and dips throughout the year. This is especially true in startups and small businesses.
If you’re a new business looking to get the ball rolling, a short term loan is an ideal option. Applying for a loan keeps you from racking up your credit card. It also allows you to borrow just enough to tide you over until your sales perk up again.
The purpose of any company is to expand and grow. Once you’ve reached the point of higher revenue and consumer interest, you may need to change up some things internally to meet these growing demands. Maybe you need to hire a few more customer service representatives. Or maybe you want to launch a new product or service line. If you’re facing expansion but require upfront funding, consider a short term loan. This gets you the capital you need.
Without funding, a business never gets off the ground. To keep your business afloat, be sure to analyze your lending options before deciding on one. Take a look at your budget, your expected sales, and your profit margins to ensure that you’re making the best lending decision possible.