Small business owners often lack the financial resources required for business expansion, purchasing inventory, etc. Adding a new product to your portfolio, or buying equipment can help to increase the revenue in the long term. This is when short-term business loans come to your rescue. If used responsibly, it can make a difference if no other resources are available.
On the other hand though, applying for a loan means getting stuck in an endless cycle of crushing debts that will slowly eat out your entire business’ cash flow. Hence, when you decide to apply for a business loan, make a list of pros and cons and then take your decision. To help you out, we have listed a few advantages and disadvantages of a short-term business loan.
Here are a few advantages of taking a small business loan:
1. Easier to qualify: It is quite easy to get a small business loan. Requirements are usually much more relaxed, and even those who have a bad credit score could qualify for the loan. A proof of employment, some personal possessions (a house or a car) or a valid checking account are all you need to get cash in hand the same day you apply for a loan.
2. Quicker to obtain: Short-term loans can be secured in just a matter of hours or days instead of weeks or months. The paperwork is minimal and there’s no need to wait for a longer duration if you are in urgent need of funds. Most of the time you just need bank statements of the last few months, saving yourself a lot of time instead of wasting it waiting for financial documents. Whether you require funds to repair a machine or buy a new asset, a short-term loan can be a great solution to stay in business.
3. Payment plans with limited duration: Short-term loans must be paid within 3 to 18 months. The lender is usually paid back on a daily or weekly basis instead of a monthly basis. If you are able to pay back the money you borrowed quickly then you can get rid of the debt in a very short time. The limited time period of repayment and set payment structure of these loans is especially beneficial since the debt will be quickly cleared off your book, often even before the fiscal year is over.
Here are a few disadvantages of a short-term business loan:
1. Strong cash flow is required: If you have a strong cash flow, you can easily avail a short-term business loan. A poor cash flow can slowly suffocate your business if you’re not careful. If an emergency arises or the cash flow is tight and prevents you from making the payment on that loan, there’s a significant risk of falling into a never-ending debt trap cycle.
2. High-interest rates: Long-term loans come at a lower interest rate as compared to short-term business loans. This is because you have much more time to pay a long-term loan. Also, the interest rate on a short-term loan depends on many factors such as your personal credit score and your income. If you have an excellent score and income, you may get the loan at lower interest rates.
3. Preference is given to established businesses: Many lenders prefer businesses with a proven credit history and profitability, making it difficult for new customers to obtain a loan. Keeping records of your invoices and trading history will increase your chances of obtaining a competitive loan.
4. High cycles are risky: Weekly payments can pose a serious threat if your revenues are unpredictable. If cash flow is poor you may have to face additional penalties for default in payments or worse, you may be forced to make another loan to pay the first one.
Hence, cautiously understanding the limitations and benefits of a short-term loan is vital to avoid bankrupting yourself.