If you’re running a business, whether big or small, there may be times that you lack funds to cover some expenditures. This is especially true if your profits aren’t sufficient to maintain a steady flow of cash for your business. Thankfully, applying for a short-term loan can be one of the quickest ways to obtain cash. Due to its attractive features, this type of loan is gaining popularity in the business industry.
If you consider short-term loans as a great financial solution for your business, here’s everything you need to know about them, including their benefits.
What Are Short-Term Loans?
In simple terms, a short-term loan refers to a type of loan that can be obtained to fund a personal or business financial need. Compared to traditional loans from banks and other big financial institutions, it can be used to obtain instant cash when your company falls short of funds. If you’re not qualified to get a line of credit from a bank, a short-term loan can be a great alternative option. This means that if your business faces a sudden temporary financial trouble, such type of loan can help you.
Also, unlike other types of loans, short-term loans come with short repayment terms. Instead of paying for them for years, these can be paid off within six to 18 months at most.
Furthermore, short-term loans have different types, which include the following:
- Payday Loans – One of the common types of short-term loans are payday loans. These are easy to obtain, making them an excellent financial solution for those people who are looking for emergency cash. However, compared to other loans, applying for payday loans means paying the entire loan amount in one lump sum upon the arrival of your next paycheck. And, since they can easily be accessed, they usually come with very high interests.
- Merchant Cash Advances – If your company has large credit/debit card sales, then applying for merchant cash advances can be a perfect way to acquire funds in the fastest time possible. With this type of short-term loan, the lending institution will let you borrow a lump sum amount, which can be repaid by giving them a percentage of the daily credit/debit card sales. This means allowing the lender to access your credit card facility and take the repayments until the total loan amount is paid.
- Line of Credit – This is a type of short-term loan in which the lending institution sets the maximum loan amount you can borrow based on your creditworthiness. This means that if you have a higher credit score, you can borrow up to $10,000. But, if you have a poor credit score, you may only be qualified for a loan amounting up to $5,000. Also, getting a line of credit for your business means that the loan amount can be received in a lump sum or installments. After repaying the borrowed amount, you’ll be eligible again with a fresh line of credit with the same loan amount.
- Invoice Financing – This type of short-term loan makes use of your business’s accounts receivables. When applying for invoice financing, your company will borrow money from a lending institution against the money due from your customers based on the number of weeks that the invoices remain outstanding. For example, if your customers normally take 30-45 days to pay their invoices, you can take advantage of invoice financing to ensure the liquidity of your business. When the customers pay the invoice, the lender will get the interest charged on the loan and return what’s remaining to your company.
- Short-Term Bank Loans – Compared to a line of credit, this type of short-term loan isn’t renewable after the full loan amount is paid. If you want to borrow money again, you have to apply for a new loan to the bank.
- Installment Loans – With the advent of modern technology nowadays, getting a loan can also be done online. This is how installment loans work. They’re relatively easy to obtain because the process is done digitally, from filling in an application form to getting loan approval. Once your loan gets approved, you can receive the money from your bank account.
As you can see, there are several types of short-term loans. Depending on your personal and business needs, each financial option comes with a different set of terms and conditions. Hence, you should do thorough research about these loan options and determine which one works best for you.
How Can Getting Short-Term Loans Benefit You?
Now that you’re familiar with what short-term loans are, it’s time to explore how obtaining this type of loan can benefit you and your business. Below are the benefits of short-term loans that you should remember from the get-go:
- Perfect for Emergency Situations
Typically, needing money to support a business emergency can be extremely stressful. Since most banks and financial institutions are strict when it comes to the loan requirements, the opportunity to obtain money as quickly as you can is almost impossible, but not until the availability of short-term loans in the market.
With these loans in place, you can easily and quickly attend to your business’s unexpected need for cash any time of the day. This is definitely a perfect solution for situations where your company needs to keep a steady flow of funds for the operations.
- Fast Approval
If your business needs quick access to cash, then short-term loans can be the way to go. Depending on the lender, you can get your loan approved within a few hours after filling in an application form. With the age of the Internet today, borrowing money can be done online. Just comply with all the requirements, and you can have access to your money within the same day or the next business day.
- More Relaxed Qualification Requirements
Aside from fast approval, applying for short-term loans isn’t difficult, thanks to their more relaxed qualification requirements, which are easier to meet in full. The most common requirements for these loans include bank statements, valid identification card, and proof of income, among others. Also, as distinguished from personal loans, a credit score isn’t a primary qualification criterion for short-term loans.
For example, even if you have a poor credit rating, such a score doesn’t significantly affect your chances of getting loan approval. Hence, there’s no doubt they’re considered lifesavers of businesses and individuals who have bad credit scores.
- Short Repayment Period
As mentioned, short-term loans can be paid within a short duration of time. Thus, if you need an emergency fund for your business, you can consider these loans as your option. Once you’re approved for the borrowed money, you’ll be given with short repayment terms, particularly within six to 18 months. This is advantageous as it enables you to pay back your loan in the fastest time possible so you can pay attention to more important financial matters.
- Opportunity to Improve Your Credit History
Since this type of loan can be paid off using a shorter repayment period, it’s much easier to repay the money you borrowed. And, if you have a poor credit score, repaying it on time can help improve your credit history.
When this happens, you have a greater chance of taking out a bigger loan in the future. Not only that, but having a good repayment record can help you rebuild a good credit standing even in a short span of time.
- No Need for Collateral
Most short-term loans are unsecured loans, which means that they don’t require collateral security before you can get approval. Even if you have nothing to give as collateral, there’s still a high probability that the lender will approve your loan. This is one of the reasons why this type of loan is easy to obtain despite your personal and business’s financial circumstances.
- Flexible Loan Amount
Since the funds are intended for emergency use, the loan amount for this type of financial service ranges from $5,000 to $300,000, depending on your situation. This makes short-term loans more flexible because the amount of money you can borrow can be lower or higher than you actually expect.
Moreover, even if the amounts involved can’t be used as a long-term investment, you still have the chance to qualify for a bigger, longer-term loan as long as you have a successful and proven track record in repaying the borrowed money.
- Lower Interest Payments
As short-term loans are usually paid within a short period of time, you can take advantage of lower interest payments, which means that the amount of interest being paid is significantly lesser than those in long-term loans. The earlier you pay back your loans, the lower your interest payments will be. This is also one of the benefits of taking out a short-term loan.
Final Thoughts
Indeed, short-term loans are meant to solve the cash flow issues of the borrowers. Therefore, if your business is strapped for funds, these loans can be considered as your first line of defense. But, given the variety of short-term loans to choose from, it’s best to evaluate your choices and settle for a type that’s best suited to your business.
Hopefully, this article has proven to be useful in understanding what short-term loans are and how they can be advantageous to business owners like you.
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