2015-07-21 16:18:08LoansEnglishShort-term loans are one resource available for cash-strapped businesses, but they're not without their drawbacks. Read this piece to see...https://quickbooks.intuit.com/r/us_qrc/uploads/2015/07/2015_4_22-large-am-when_and_how_to_use_short-term_loans_for_your_small_business.pnghttps://quickbooks.intuit.com/r/loans/when-and-how-to-use-short-term-loans-for-your-small-business/When and How to Use Short-Term Loans | QuickBooks

When and How to Use Short-Term Loans for Your Small Business

2 min read

From expanding product and services lines to dealing with short-term cash shortages, there are various reasons that small businesses seek to borrow money. Before you approach a lending institution, it’s important to assess your reasons for pursuing the loan and determine which funding type suits your needs.

One option is a short-term loan. Like traditional loans, short-term loans generally require applicants to pay interest on the principal advance, and usually involve smaller cash sums and shorter repayment periods. Unlike traditional loans, short-term loans, usually involve smaller cash sums and shorter repayment periods. In fact, most short-term loans reach maturity in less than a year, compared with long-term loans that may last for decades.

Additionally, short-term loans can be easier to obtain than their traditional counterparts.

Here are a few reasons that small businesses may want to pursue short-term loans over other lending types.

Resolving Cash Flow Issues

If your business has a cyclical or uneven sales structure, short-term loans may be helpful to resolve cash flow shortages. For example, if a business is struggling to find funding for supplier bills and other expenses, a short-term loan can help bridge the gap.

Easing Seasonal Trends

Similarly, short-term loans can enable businesses to keep up with seasonal trends. For example, many businesses require extra capital and staffing during the holiday season. A short-term loan enables a business to cover its costs as it prepares  for the holiday shopping rush.

For Emergencies

Every now and then, a situation may arise for which your company is unprepared. With short-term loans, businesses can withstand events like equipment breakdowns, computer crashes, or natural disasters.

Pros and Cons of Short-term Loans

Borrowers may appreciate that because short-term loans tend to mature within a year, the loan will be paid off more quickly than some other types of debt financing. In addition, if your business has a low credit rating, taking out a short-term loan can be an effective way of building your score. If the short-term loan must be repaid within a few months, borrowers tend to see an impact on their credit.

One of the drawbacks of short-term loans can be higher interest rates. In a healthy economy, short-term loans tend to have higher interest rates than their long-term counterparts. When setting loan rates, lenders start with the prime interest rate and add a premium based on the degree of risk associated with your company. It’s important to note that short-term rates tend to drop when the economy enters a recession.

Short-term loans are one method of funding a business venture. By researching various financing options, you can determine which lending type might be a good fit to help you in meeting your business goals.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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