Every business experiences a fluctuating cash flow every now and then – not to mention start-ups, which face numerous financial challenges, as well. There are many reasons why that may happen – you might need to compensate for slow-paying customers, or buy supplies for an unprecedented order, and the list may go on. In times like these, short term business loans can seriously make the world of a difference.
Introducing Short Term Business Loans
As their name already suggests, short-term business loans feature a fixed, limited lifespan, which is usually short. As a rule of thumb, the sums of money you can get via this form of financing are small. That is primarily what makes short term business loans relatively easy to obtain, in comparison with standard, long-term loans.
Evidently, though, short-term business loans aren’t suitable for every scenario. To be more specific, this form of financing isn’t appropriate if, say, you plan on buying an important piece of equipment you’ll be using for many years to come. The most common application is, of course, to deal with cash flow problems. For example, seasonal downturns and upturns are common for (almost) every industry.
Nonetheless, what are the imminent risks that come with this type of financing? What shouldn’t miss your attention?
The Downsides of Short Term Business Loans
Similar to any other form of financing, there are disadvantages as well as advantages. To start with, in comparison with long-term financial products, short-term financing attracts higher interest rates. Nevertheless, this doesn’t necessarily imply that the total interest cost will be higher – that will depend on the terms of the loan, as well.
On the other side, the amount of money you pay in interest rate will be dictated by several elements. One of them will be your credit score and, of course, your firm’s financial circumstances. As a start-up, it can be difficult for you to prove your creditworthiness and reliability since you’ve just started out. Therefore, this could mean that start-ups will definitely pay more in interest rate than well-established, experienced companies.
Experienced firms might be more successful in negotiating for more favourable loan terms, even in the case of short term business loans. Still, if you want to lock in more convenient terms, an option worth considering might be to secure an asset to the loan. Even though short term business loans tend to be unsecured, adding collateral means that you might get more convenient terms and, at the same time, smaller interest rates.
Concurrently, another impending danger of short-term financing is that you might get addicted to this type of borrowing. That is to say, you might enter a vicious borrowing cycle. For example, if your business depends on short term loans for surviving on the marketplace, then, something is definitely not right – this means you should change your approach.
Of course, obtaining short-term loans is much easier than getting long-term financing – hence, entering a vicious cycle doesn’t require much effort. This is, perhaps, one of the biggest risks that come with the territory.
Therefore, if you find that you’re continually turning to short term business loans, this could indicate that there is a problem that requires your immediate attention. Ideally, you should aim at eliminating the problem at source, which causes your constant need to get short-term financing.
How to Protect Your Start-up?
We all agree that short-term business loans can be very advantageous – especially when you manage to get a convenient deal. Obviously, the lender you collaborate with will play a critical role in this respect. You should do your research and determine whether this form of financing is truly the right one. Make sure you factor in the high interest costs, and the likelihood that you might struggle financially if you depend on these loans more than you should. At the same time, you should comprise a clear repayment plan before applying for this type of loan. Even though the application process is fast and convenient, this doesn’t mean that you should take it lightly. If you don’t manage to make repayments, the additional fees and penalties will add up, and this should be avoided at all costs.
To sum up, it goes without saying that, in many instances, a short-term loan might be the only solution to an unprecedented cash-flow problem. Therefore, we’re not saying that you should stay away from this form of financing at all costs. All we’re saying is that you should factor in all your options beforehand, to be sure that this is actually the right solution for your given circumstances.