Lack of funds can be the most dangerous condition for a small business, and the business owners try to get funding from various sources to meet the company’s requirements. Short-term business loans fascinate small business owners because they get it quickly with little paperwork and simple formalities.
Alternative lenders and small business administration (SBA) offer short-term business loans to small business owners. However, as every business is different, it is optional that short-term business loans will benefit every small business owner.
Before applying for short-term business loans, you must properly understand its advantages and disadvantages. This will help you to make informed decisions about your business funding.
Let’s discuss short-term business loans in detail and understand their advantages and disadvantages.
What are short-term business loans?
Small business owners apply for short-term business loans to cover several business expenditures requiring short funds. These expenses can be emergency or unexpected situations that occur in the company and lead to a shortfall of cash.
Short-term loans are easier to apply and more flexible than other loans. The repayment tenure is as short as 12 months, and the interest rate is usually low. Short-term business loans involve a quick application process and the fastest disbursal of the amount in the company’s account. You can also apply it in case you need a better credit report.
The Pros and Cons of Short-term Business Loans
Short-term business loans are becoming one of the most preferred options among entrepreneurs to get quick funding. These loans offer various advantages to the borrower, but simultaneously, multiple cons can lead to significant losses to the company.
Pros of Short-term business loans
Here, we will discuss the pros of short-term business loans:
1. Fast Funding
Short-term business loans offer you the fastest funding, and you receive the amount in the bank account within a few hours. Only some lenders take up to 3 days to disburse the amount. You can meet the instant needs of your business with short-term loans.
2. Flexibility in Use
Modern short-term business loans provide flexibility in how you use the funds. Whether you need to manage cash flow gaps, purchase inventory, invest in marketing campaigns, or cover payroll during a slow month, short-term loans can be used for various purposes.
Short-term business loans are flexible in repayment tenure. You can choose the tenure as short as 12 months and a more extended period up to 60 months. It also offers you the option of prepayment, but you must check if your lender is charging extra fees for prepayment or not.
3. Easy to apply
Applying for a short-term business loan doesn’t require extensive paperwork or troublesome formalities. You can apply them online and upload the documents on the lender’s website. You will get the approval instantly, and the amount will be provided within a few hours to 2-3 days.
4. Lesser requirements
Short-term business loan lenders don’t bother about the age of your company; if your business is 1 year old, you can get the loan. Also, you can get a short-term business loan even if your credit score is not good.
Cons of Short term business loans
Here, we will discuss the cons of short-term business loans:
1. Small loan amounts
Short-term business loans offer small amounts only. You can only get the amount less than $100,000. These lenders delve deep into your company history and other details only after financing; they usually cap how much they can provide.
2. Short tenure
Short-term business loans offer only short tenures, such as 12 months. If you think your business will need more time to earn to repay the rigid repayments, you better not apply for these loans.
3. Frequent repayments
Different types of short-term loans and lenders demand more frequent payments than long-term loans. Some lenders may ask you for weekly payments, which can be troublesome. So, before applying, you must find out their repayment process.
4. Higher cost
Short-term loans generally charge higher Interest rates. Various short-term business loan lenders charge more than a 30% interest rate. Also, business owners who take short-term loans often complain about the higher fees and underwriting charges. The lenders may also charge various fees, such as late fees, missed payment fees, etc., making it troublesome for you.
Before applying for short-term business loans, you must carefully understand the lender’s policy and check if you can cope with their rules and regulations. Otherwise, short-term loans can lead to a debt trap. However, short-term loans have also proved to be highly beneficial for many new business owners. It all depends from business to business and their financial conditions.