No one can deny the fact that running a business is a hectic and challenging task. Business owners have to look after various factors, due to which dealing with the finances needed to run a full-fledged business can be difficult.
The good thing is that there are numerous options like short term business loans to get capital to establish a business and run it smoothly. Acquiring business loans is one of the best ways to run a company without facing a financial crunch.
There are two main types of business loans you can get from different lenders: long term business loans and short-term business loans.
This article focuses on the basics of short term business loans and some of the most important things you should keep in mind while applying for short term loans for your business. So, let’s get started:
What is a Short Term Business Loan?
As the name suggests, short term business loans are meant to fulfill the immediate financing needs of the companies. Some of these needs can be bridging the gap in cash flow, dealing with a financial crisis, or taking the benefit of an unexpected business opportunity.
Generally, short term business loans are much easier to obtain than long term business loans. In simpler terms, if you are running low on cash or facing a dull business cycle, you can rely on short term business loans to maintain a positive cash flow.
You can also think of short term business loans as quick-turnaround loans that you will pay back quickly instead of managing debt for an extended period.
Average Duration of a Short Term Business Loan
All of the short term business loans have a fixed period in which the borrower must repay the loan. Generally, this timeframe is anywhere between 6 to 18 months.
Most of the short term loans also have a fixed amount of money that the borrower has to pay every month, along with interest. Businesses, especially small ones, like to rely on short term loans because the lenders can provide access to the funds within 24 hours or even less after the approval.
Eligibility Criteria of Short-Term Business Loans
Generally, anyone who is running a business with revenue can apply for a short term business loan. However, the exact requirements regarding the credit score, sales volume, and profitability can significantly vary from lender to lender.
Some of the primary aspects seen in a business for a short term business loan are:
- Low revenue
- Subprime credit
- Lack of financial statements, including tax returns, business sheets, and profit and loss.
- The business has been operating for less than 3 to 4 years.
- Business needs money on an immediate basis.
You can watch the following video to better understand the fundamentals of short term business goals:
When Should You Apply for a Short Term Business Loan?
Short term business loans can come in handy at various stages of running a business and making it successful. If you are sure that taking the loan will help you improve your position, you should go for a short-term loan for your business.
Some of the common situations in which a short term business loan can be beneficial are:
- Short term loans can be useful in bridging the gap between accounts receivables and payables.
- If you need capital to deal with an emergency or to deal with a large-scale project quickly, you will need a short-term loan for your business.
- If you face a dull business cycle and do not make enough profits, a short-term business loan can help you get through it.
- Unexpected repairs and maintenance needs can arise in your office, for which you will need financing quickly.
Advantages and Disadvantages of Short Term Business Loans
There is no doubt that short term loans can greatly benefit your business in overcoming a financial crisis and getting capital quickly to maintain your business. Yet, there are certain disadvantages of short term business loans as well.
Let’s look at both pros and cons of short term business loans:
Advantages of Short Term Loans
The fact that short term loans provide you financing in a very short period is certainly the leading benefit of a short term business loan. Some of the other advantages of these loans are:
- Short term loans have flexible repayment options. Borrowers can customize the short term loans as per their own convenience and enjoy flexible repayment options.
- Most of the short term business loans are funded within 24 hours or even less.
- It is much easier to get approvals for short term business loans than long term loans.
- Businesses can rely on short term loans to fulfill their immediate needs, like covering the cost of equipment repairs and bridging the gap in their cash flows.
Disadvantages of Short Term Loans
While you can certainly get several benefits from a short term business loan, there is one major disadvantage of these loans as well. Almost all of the short-term loans have a much higher interest rate than a regular loans.
As a result, the borrower is required to make significantly greater and more frequent payments. Moreover, some of the lenders ask you for collateral, even though it is not necessarily needed for a short-term loan.
How to Apply for a Short Term Business Loan?
Applying for a short term loan is much easier than applying for a traditional business loan. The exact requirements of the loan application are dependent on the lender. Most of the modern loan options include an online application. Hence, you will be required to fill the complete application online.
Generally, you will have to provide documents like proof of ownership, bank statements, tax returns, profit and loss statements, and a copy of your passport or driver’s license. Your business or personal credit score will also be evaluated in the process.
Most of the lenders of short terms loans do not put too much emphasis on the credit score. However, you might be asked to provide collateral. Once the loan application is approved, you will get the funds within 1 to 2 business days.
Best Short Term Loan Options
Some of the highly-rated short term business loan lenders in the USA are:
Traditional business loans are hard to acquire due to strict requirements and lengthy approval procedures. Short term business loans solve these issues as the business owners have a variety of short term loan options to get the funding quickly and keep their business running smoothly and efficiently.
You can check out our other finance-related articles to learn more about various aspects of finance.