Thursday, 4 February 2021

Short-Term Loans: Are They Right for Your Business?

Running a successful business does not happen overnight. You’ll experience financial hiccups, like emergency expenses and interrupted cash flow, that will require immediate funding. Thankfully, there are various financing options you can explore to help cover costs. One of them is taking out a short-term business loan. Read on to find out if it’s right for you. 

What Is a Short-Term Loan?

A short-term loan, also referred to as a working capital loan, grants entrepreneurs access to fast cash. This type of funding needs is paid back in a shorter period, usually between three months to three years, depending on the lender. 

This financing option also comes in different types. Here are some of the most common ones:

  • Line of Credit (LOC) – works the same way as credit cards; business owners can access a certain amount of money, pre-determined by the lender. 
  • Payday Loan – borrowing limit depends on the business owner’s earnings. 
  • Merchant Cash Advance – repayment is made by giving a percentage of the sales to the lender until the loan is paid in full.  
  • Invoice Financing – recommended for business owners with clients that have outstanding payments; uses the client’s invoice as collateral to take out a loan. You can easily create an invoice using invoice maker by Billdu.

What Requirements Do I Need?

Short-term financing can be obtained from different financial institutions like credit unions and banks. So, qualifications will vary depending on where you choose to apply. Be sure to do your research and prepare the requirements beforehand. To set your expectations, here are some documents that most lenders will ask for:

  • Personal credit score
  • Business tax ID number
  • Cash flow history
  • Payment history for other loans 
  • Credit history
  • Statement of income

Where Can I Use a Short-Term Business Loan?

Short-term loans can be used in many ways. Here are a few situations where they can be utilized: 

Expanding a Business

Once your business starts to pick up, you might eventually want to expand operations. Short-term financing can help cover the costs of renovations, hiring additional employees, advertisements, buying new equipment, and so on. 

Upgrading of Equipment

As a business owner, you want the best for your clients. This means investing in quality equipment. Unfortunately, these machines come with a hefty price tag. Taking out a loan might be the best option to explore. 

Covering Emergency Expenses

Anything can happen when running a business—from equipment repairs to covering damages from natural disasters. A short-term loan can provide the amount you need to keep your company operational during this time. 

Dealing with Losses During Off-Season

Bringing in revenue can be challenging, especially for seasonal businesses like souvenir shops and theme parks. A short-term loan can help keep your company on its feet during this period. It will help you cover costs for utilities, employee salary, inventory, and so on. 

What Are the Advantages of Short-Term Business Loans?

With proper planning, this type of financing option can help business owners bounce back from minor financial setbacks. Apart from that, here are other benefits that you can get from a short-term business loan:

Easier Application Process

Unlike regular loans, short-term financing involves a less stringent application process and minimum paperwork. You don’t even need to have an impressive credit history to qualify for one. Some lenders have an option to apply online.

Quick Turnaround Time

Short-term financing can be obtained within a few days after approval. In fact, some lenders provide funding as fast as one to two days. This is also the main reason why it is recommended for covering urgent financial needs.

Can Be Used for Different Purposes

Some types of funding, like grants, can only be used for specific purposes. However, with a short-term loan, there’s no limit to its usage. You can use it for basically any type of business expense. 

Key Takeaways

Borrowing money can be scary for some entrepreneurs. However, when done the right way, it can help businesses grow. Before taking out a short-term loan, be sure to weigh the pros and cons first. It’s also best to consult a financial advisor, especially if it’s your first time applying for one. By taking these extra steps, you’ll be able to secure the right type of funding for your business. 

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