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.
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.