Imagine that you are a small business owner or an entrepreneur and want to take your business to the next level. Imagine that you are just starting your business venture and get if off and running. It all seems great, but then you realize ‘where am I going to get money for it and quickly’. Your best bet will be fast short term loans. Why should you choose short term loans over traditional loans? What advantage does short term loans have over long term loans? These are the questions that will be boggling your mind when you want to get a loan.
To answer all these questions and more, we have prepared a guide, so that you can understand short term loans and the benefits it can give to your business.
What are the short term loans?
A loan that can be paid off quickly, usually in a few months or a year, is a short term business loan while long term or traditional loans can take years and in a few cases decades to pay off. They are much quicker than long term loans in the sense that you will receive the money in 24 to 48 hours.
The amount usually does not exceed $500,000, and you do not have to go through the paperwork that you normally would in a long term loan. Thus, short term loans are quick, flexible and easier to get as all the complications involved in the traditional counterpart are stripped away.
Uses for Short term loans:
Short term loans are used when the business wants to pile up inventory. For example, a gift shop that wants to stock up on its suppliers for the Christmas season. This is the perfect and appropriate use of a short term loan, as you will get the money quickly and stock up way before the holidays and repay it in a few months in installments after the holiday season.
Short term business loans are used when you need new employees or when you need a bigger and better site. When you need more employees or a new working site, it is a sign that you are business is progressing but you might not have the money to bring that employee on board. Short term loans help in that aspect and help in covering the cost.
These loans also help in buying new equipment like computers, vehicles or any other machine that your business uses. In the era, we live in every machine is getting quicker and faster, so your outdated and lagging equipment can hurt your business. New and improved technology be it hardware or software can make an impact on productivity and save both time and money
These loans cannot be used for purposes such as buying property or purchasing another business.
Pro and Cons
The biggest advantage of short term loan deals is that you will be out of debt quickly. Long term loans can be a drag, and you will be paying them back every month for years if not decades and that hits your budget very hard.
If you want to build your credit score, short term loans help in this way, if your repayments are complete before the due date.
By taking short term loans, you ignore other options which are very flexible but are costly as compared to short term loans. These include overdrafts, lines of credit, business credit cards, merchant cash advances, and invoice factoring and discounting. Traditional loan lender’s approval rates are 30%. So the majority of the small business owner is turned down by long term business loan providers.
We have discussed the positive. Now it is time to look at the negative and the biggest one is the higher interest rates. Compared to long term or traditional loans, short term loans have higher interest rates. This depends on your credit score and your company’s financial condition. Short term loans typically have an interest rate of 8 to 13% are fixed.
A start-up will have to pay more and might not get the loan. Still, if you are a proven businessman whose business is expanding and growing with a good credit score and with proven records of profitability, you might be able to negotiate the loan on your terms at a competitive rate.
Borrowing is another issue. Small business tends to get into a habit borrowing from short term loan lenders. Since it is so easy to acquire short term loans, business tends to get into a habit of borrowing and repaying whenever they have a huge tax bill to pay, or business is slowing. If this is the case, then you should alternate methods that are mentioned above.
How to get short term loans
There are a few steps involved in this process so let us address them:
1. You should check your credit score. This is important because lenders check your credit score to distinguish the risky borrowers from the safe ones. The higher your credit score, the more you can get favorable terms for your loan. If you have a low score, then work to improve it.
2. There are a lot of vendors out there, and not all of them are the same. First of all, check out the lender’s eligibility criteria to make sure that you are eligible for the loan. A lender with awesome online reviews and clear terms and conditions that offers an affordable rate is the one you are looking for.
3. Next are the financial and personal documents which are required. Bank statements, driver’s license, pay stubs etc.
4. Complete the application which most often than not is available and can be filled online. It requires to upload the documents you gathered.
5. Finally, you have to wait for the approval. Since it is a short term loan, you do not have to wait long to find out whether you are successful or not.
Short term loans are fast and quick. They help small businesses in their time of need without having to carry the debt for the rest of their lives. Short term loan, although having higher interest rates than long term or traditional loans, is short term and can be repaid in a few months or a year.
So, if you are an entrepreneur looking to start a venture or a small businessman looking to grow and expand short term loans is the best option.
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