Every small business requires money to operate. Sometimes, however, resources are limited and a long-term loan is not readily available. That is when a short-term loan becomes an effective, and potentially business saving, tool.
Short-term business loans are designed to help you as a business owner bridge the gap between needing and receiving monetary funds. While there are some drawbacks, these types of loans can be a lifesaver when you find yourself in need. Although they work a lot like other types of loans, there are some key differences that make these loans an attractive option.
In this post, we’ll explore how short-term loans work, how they can benefit your business, what risks to be aware of, and how you can apply for one.
What Are Short-Term Loans?
Short-term loans provide quick and easy access to working capital—without a long-term commitment period which can sometimes be more beneficial. They are ideal for recovering from a sudden loss in revenue, which many businesses experienced during the pandemic. They are also used to upgrade business facilities which can lead to more profits in the long run.
Short-term loans typically have a repayment period of one to three years, with monthly or weekly payments. Most short-term loans have fixed interest rates, which means that the interest rate will not change during the life of the loan, making payments easier to budget for.
What Are the Benefits of Taking Out a Short-Term Loan?
Short-term loans can be a great option if you’re in need of financing for a specific purpose or project. For example, your facility may be outdated and renovations are needed to attract more attention from clients and investors. You may also be in need of upgrading your equipment which can subsequently increase productivity, cut costs, and generate more revenue.
During the recent pandemic, many businesses experienced a sudden loss in customers and income. Having quick access to monetary funds made the difference between losing and keeping their businesses. Short-term loans gave them the funds they needed to pay their employees, and implement business strategies for adapting to the changing needs of their customers.
Therefore, should you find yourself in need of a quick and specific fix for your business, or funds to help keep you afloat, short-term loans can be the ideal solution.
What Are the Risks Associated with Short-Term Loans?
Depending on the lender, short-term loans may have high interest rates. Therefore, it is important to compare rates before you apply for a loan. Short-term loans also typically have shorter repayment terms which forces you to repay the loan more quickly than you would with a long-term loan. This could cause problems if your business does not recover financially, or does not experience the increase in profits you expected.
What Are Alternatives to Short-Term Traditional Loans?
There are alternatives to short-term loans that carry their own risks and benefits. One option is to use a corporate line of credit. Like a credit card, you get access to a specific amount of funds and only pay interest on the amount you use. Once you make a payment, those funds become available again as revolving credit.
There is no lump-sum disbursement made when you open your line of credit, and no interest accrues until you utilize the funds in your account. You may, however, have to provide collateral in exchange for funds. A corporate line of credit can be a good option if you need a small amount of money and you have good credit.
Other options are to use a business credit card, invoice factoring, or take out a personal loan from a lending platform. These options will provide you with funds but may have additional restrictions when it comes to credit checks, available funds, and interest rates.
How Do You Apply for a Short-Term Loan?
To apply for a short-term loan, you will need to contact a lender, submit an application and provide financial information which may include income, expenses, and credit history. The lender will also need to see your business plan and financial statements. Once you have met the lending requirements and have been approved for a loan, you will sign a contract and begin making payments.
Short-term loans can be a great solution if you’re a business owner who needs to cover an unexpected expense, or if you are experiencing a temporary cash flow problem. The benefits of short-term loans include fast approval and funding, easy online application, and no collateral required. However, there are also some risks associated with these loans, so it’s important to understand what you’re getting into before you apply.
There are many different types of short-term loans available, so it’s important to compare your options and find the best loan for your business. If you’re interested in applying for a short-term loan, our team at Crown Bank can help you get started. We have years of experience working with all types of businesses and we will prioritize your overall success.
Connect with our team today and we’ll help you get the funds you need to make the possible, possible. Let’s connect.