Short Term Business Loans- Why They Work and Things to Consider

When it comes to raising funds, start-ups and young organizations are constantly under pressure. Even after the initial funds may have been acquired to kick start the operations, having enough working capital to make sure things are running smoothly and all areas are covered is one big challenge especially from the point of view of staying afloat and sustainability.

One option when it comes to marinating a comfortable working capital is to invest ones’ own money and resources but this is not an ideal situation Tying up and investing personal money in a new business can be a big risk and something that needs to be considered carefully.

One solution to this problem is to go for a short-term business loan, also commonly known as working capital loan.

Short-term business loans and their benefits:

Designed pretty much to cover almost all kinds of everyday financial needs of a business, these short-term business loans offer many advantages. In most cases these loans need to be paid off within a year but that is enough time to help stabilize the day to day working of a business.

-Easy to get: One big advantage of these loans is the speed with which they can be obtained. They are easier to get given that the lender does not go deep diving into the borrower’s business and hence the roadblocks are significantly less. Most new businesses are not in a position to show depth of assets or capital and these short -term loans are ideal for them as they are much easier to get.

Retention of ownership: This is a huge advantage given that taking on a short -term business loan still allows the business owner complete retention of ownership (unless otherwise stated in specific terms) and decision making power. The obligation is limited to the borrower having to make repayments on time and does not extend to the running or authority over the actual business in any shape or form.

-No upfront collateral: Given that a number of working capital loans are unsecured, the borrower does not need to furnish any collateral or security upfront in order to secure them. In some cases, while banks might still ask for some form of security, independent lenders are far more lenient and open to giving out short-term loans to individuals and businesses that may not have the best credit history.

Short-term business loans: Things to consider:

As it goes for pretty much everything else, short-term business loans also have some pitfalls that need to be considered. While one might still go ahead for the option, it is important to be aware of the disadvantages so that an informed decision can be taken.

-Rates are higher: Clearly because it is much easier to secure this loan and the risk for the lender is higher hence these short term loans come with high interest rates when compared to long term loans. As a result of this daily re-payments are higher and it is critical to ensure that ones’ cash flow actually allows for these frequent payments to go through consistently. Defaulting on payments can lead to accumulation of considerable amount of late fee and lead to much larger issues.

Debt Traps: In the case of short- term business loans many businesses run the risk of getting stuck into what one might call the debt trap. What this means is that for some reason is one is unable to make the repayments regularly, refinancing of the loan may become a requirement and every single time that this needs to be done, more and more money becomes owing in interest as well as fees. Hence it’s critical to calculate the everyday payments beforehand and only go for the loan if one is confident of being able to fulfill the requirements.

Keeping these considerations in mind, overall, short-term business loans when handled properly are mostly a positive solution that can help in the growth and running of a business.