Fluctuating cash flow is a challenge that every small business faces at one point or another. Whether it’s buying supplies for an unexpected big order or compensating for a slow-paying customer, the ebb and flow of finances is par for the course of being in business, and a short-term loan is a viable solution when you are strapped for cash.
Getting a handle on how you can access the extra financing you need — now or for a “just in case” scenario in the future — could be a critical move in keeping your cash and operations flowing smoothly.
What Business Owners Need to Know About Short-Term Loans
Many businesses find that a short-term loan is a great way to fund a wide variety of business financing needs, like an expansion, securing more favorable pricing on other short-term debt, paying taxes, or putting extra cash into the business to take advantage of new opportunities. Compared to other loan types, which may dictate the specific use of funds, short-term loans can be used for almost any business purpose.
Short-term loans can typically be secured for $2,500-$250,000 under terms ranging from as little as three to 18 months. Their interest rates start around 14 percent (and go way up).
While these loans provide a lot of spending flexibility, it’s still a good idea to weigh the pros and cons of short-term loans against other loan types to be sure it’s the best choice for your business. Here’s what you need to consider when it comes to securing a short-term loan.
Stable, Predictable, and Straightforward
A short-term loan is a stable, predictable, and straightforward vehicle from which to borrow money — very much like a traditional loan. Once you are approved, you receive a set amount of cash upfront. You agree to pay this cash back, along with the lender’s fees and interest, over a predetermined period of time.
The upside of short-term loans is that they are faster to apply for, easier to qualify for, and quicker to get funded. Part of the reason they are easier to qualify for is because they require limited paperwork. This means less hassle for you, and a decreased processing and funding time if your application is accepted.
Timing is one of the major benefits of a short-term loan. Many alternative lenders advertise cash in hand in as little as two days.
Additionally, bad credit isn’t necessarily a problem for getting approved for a short-term loan. So, for business owners with blips on their credit history, or a limited credit history, this can be a saving grace to getting the cash needed to keep building and growing a new enterprise.
Recommended Reading: How to Use Free Cash-Flow Effectively
Special Considerations Before You Sign
Whether you’re an owner of a seasonal business that needs to cash up for extra supplies or staffing, you have a slow-paying client, or a new piece of machinery to purchase to boost your operations, it’s always a good idea to proceed with caution when taking on debt, no matter what the reason.
As the name implies, short-term loan amounts tend to be smaller and the repayment period drastically reduced. They often come with higher interest rates, and you typically pay the lender back on a daily or weekly basis instead of monthly schedule. This is particularly important to consider if you have a pretty inconsistent cash flow, as meeting daily payments might not work for your business.
To select a loan that is the right fit for your needs, it is critical to comb through the fine details of each and every term before signing on a dotted line.
Short-Term Loans Are Not Without Their Risks
The accessibility of short-term loans comes at a price — they are some of the most expensive loans available to small businesses. It’s common to see higher annual percentage rates (APR) which means you’ll be paying more in interest on a monthly basis than you would be with a longer term loan. These loans also often require collateral in order to guarantee the loan.
Did you know?
APR should outweigh interest rate when choosing a business loan, here’s why.
Know that if your credit is tied up with a smaller loan, you risk limiting your access to a larger or longer term loan for another business need, such as purchasing property or inventory at a discount.
And as a rule of thumb, you should always review and compare the fees, interest, and amortization of all your loan options before choosing one.
Although short-term loans make sense for plenty of situations, the best loan for your business is always the lowest-cost loan. Do your research, apply for a few different loan types, and if you find you want to secure a short-term loan, make sure your business has a clear plan on how it will pay back short-term debt to protect your finances and business credit as much as possible.