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Want to know the best way to fund your business? Use this quick guide.
Like any other business, you need working capital. Maybe you’ve applied for a small business loan but you weren’t sure it was the right next step. You’re not alone. Many small-business owners consider getting a short-term loan but aren’t sure how it would help them or are concerned they wouldn’t use the funding to its full potential.
Although each case is unique, there are some general guidelines about when to use short-term loans to grow your business—and when they’re not the most appropriate funding.
Both traditional business loans and short-term loans generally require applicants to pay interest on the principal during a set period of time. However, some short-term loans allow you to borrow smaller loan amounts and offer shorter repayment periods than you might find with a traditional business loan.
Typically, these loans might be easier to get than traditional funding, especially if they come from alternative or online lenders that have more flexible credit requirements than traditional lenders. Compared to high-interest credit cards, short-term loans may be less expensive and risky and might provide larger sums of funding. However, you could also be personally liable for the debt if your business is unable to repay it.
Some alternative lenders might charge high interest rates. Fortunately, the rapid growth of this form of lending has lead to more competitive terms, making a short-term small business loan generally faster and easier to get than a longer-term business loan. A QuickBooks Capital loan, for example, doesn’t charge origination fees or prepayment penalties.
It’s important to know the purpose of your loan to be confident that short-term financing is the best route. Here are a few good reasons why a short-term business loan is useful.
To resolve cash flow issues: Businesses with cyclical sales are good candidates for short-term loans because it may help resolve temporary cash flow shortages. A short-term loan can help cover the gap if you are looking for funding to cover unpaid supplier bills and other expenses.
Bridging a seasonal gap: Short-term loans can help businesses keep up with seasonal trends or extra costs associated with peak requirements, such as hiring additional help, purchasing more inventory, covering added costs of marketing or promotions and other expenses. A short-term loan can cover peak business costs going into the holidays, summer or other seasonal rush times.
Funding new projects: Ramping up a new project might require funding to get set up. While this startup expense might exceed normal cash flow, it also has the potential to be recouped in a few months, if not less, as customers pay for their new goods or services. Supporting new projects that have downstream profitability is an ideal scenario for short-term loans.
Purchasing inventory: Taking out a short-term loan can help you invest in your business. For example, you may come across an opportunity to purchase discounted, high-quality inventory that you can turn around quickly—another strong case for short-term business funding that leads to extra profits.
Emergencies: Things happen. From time to time, unforeseen situations come up and you might be unprepared to cover the resulting added costs. Short-term loans let businesses address issues like equipment breakdowns, natural disasters and other emergencies, without committing to a long-term obligation.
Short-term business loans fulfill many requirements but they might not be ideal for every situation. If you have an established business, equipment or assets that can serve as collateral, a healthy cash flow and a good purpose for the loan, and excellent credit, traditional bank loans may be the best option for funding items like the following:
Long-term requirements: Traditional five- or 10-year business loans are typically a more appropriate choice for long-term business requirements. These loans can provide continuous, consistent funding for businesses that are rapidly growing, adding new locations or must overcome significant barriers to entry.
Major purchases: Traditional business loans can be used for purchasing inventory, equipment and commercial real estate, which can be used as collateral to back the loan.
Debt consolidation: To refinance or consolidate debts, traditional business loans could be the better option.
Acquiring other businesses: Business acquisitions are likely better funded by traditional business loans.
If you need a flexible, cost-effective, and faster source of financing, a short-term business loan might be the right fit. Just be sure to carefully consider what you’ll use the funding for and what kind of repayment terms you’ll need, review your business credit score, and compare your lending options before you commit.