What is a short-term business loan and do you need one?
There are multiple reason why a business would need a loan – in fact, a business that never has to take out a loan at some point is rare.
Loans can cover anything from staff salaries to supplier costs to cover any shortfall in cash flow and avoid bankruptcy.
What is a short-term business loan?
Short-term business loans are often much easier to secure than medium to long-term, though they come with higher interest rates.
Short-term loans can be secured quickly and are paid back quickly, usually within one to twenty-four months.
Benefits of short-term business loans
Short-term loans can have many benefits over a medium to long-term loan.
As already mentioned, short-term loans can be secured quicker and more easily. More modern short-term loan providers use online platforms which make securing finance even quicker. Getting hold of extra money quickly can be vital when it comes to keeping a good cash flow.
Because short-term loans are repaid sooner, a business isn’t stuck with long-term interest payments and debts.
Short-term loans are often more flexible than their medium to long-term counterparts, giving you choices on how you pay back the loan.
Do short-term business loans come with risks?
As with all types of loans, short-term loans don’t come without some risks.
Since short-term loans are so easy and quick to secure, business owners can sometimes not think carefully about it, which could land their business in trouble when they find they are unable to make the repayments.
If you secure a more flexible short-term loan, the changeable interest payments can make it more difficult to forecast a business’s finances.
With short-term business loans, both monthly payments and interest rates are higher, which could negatively affect cash flow and profits. It is vital that before you secure a short-term business loan, you have a solid plan to repay it.
Are there any other options?
If your business needs cash quickly, there are alternatives to short-term business loans.
A business overdraft is a flexible way to quickly borrow money from your bank. Interest is usually a similar or lower rate than short-term loans.
Some banks and finance providers offer invoice finance, where you borrow money on unpaid invoices.
Business credit cards have higher interest rate than short-term loans, but they often come with a short interest-free period. Business credit cards are usually pretty easy to get from your bank.
Do you need a short-term business loan?
As with all types of loans, short-term business loans come with risks, so you should only get one when you need it and when you have a plan in place to pay it back.
If you need money to make an investment that will give you a profit bigger than the cost of the loan, a short-term loan can be a good idea.
If you find you have an unplanned negative cash flow, a short-term loan can be used to cover it so you can pay suppliers, etc.
A short-term loan can help if you have a poor credit rating which stops you securing other types of loans – but make sure you will able to make the repayments.