The COVID-19 pandemic created quite an economic turmoil all over the world. Some industries grew exponentially, whereas, others witnessed a steep downfall. Considering the inconveniences that occurred during the locked-down phase, many entrepreneurs ideated and launched multiple money-making business opportunities. The Business Formation Statistics (BFS) report, by the U.S. Census Bureau, says that the overall number of new business applications rose at a rate of around 20.6% from 2020 to 2021.
Every business faces cash flow gaps at some point in time, but the reason behind the crisis varies with the business type and distinctive situation of each company. Cash is the fuel that keeps a machine running. Hence, deficiency of working capital often disrupts business operations. However, there are times when business owners go through momentary money constraints, as they expect a certain amount of cash inflow from payments, scheduled to get released in the coming month. This is when short-term business loans turn out to be a savior for business owners who require transitory money to pull through.
A short-term loan can cover the current obligatory costs without affecting the regular accounts payable. Now, what are these short-term loans? Short-term loans are, technically, a type of finance that supports businesses facing a temporary financial crisis. Like any other, this financing option requires the borrower to repay the principal amount along with pre-decided interest by a given due date, which is generally within six months to a year of the approval and fund disbursement. Hence, this type of finance is named “short-term loans”. Ideal for small businesses and start-ups, who are unable to get bank loans due to insufficient credit scores, short-term loans involve lower amounts that usually range between $ 100 and $ 100,000.
Popular Short-Term Loans:
Merchant Cash Advance(MCA)
Though MCAs are cash advances in return for a percentage of the future sales of a business, these still operate like a loan. The MCA lender keeps on withdrawing a certain portion of the daily credit/debit card sales till the entire amount is recovered.
Business Lines of Credit (LOC)
Similar to business credit cards, this financing option offers a set credit limit to the borrower, who can withdraw a portion of the approved amount or the entire amount whenever required. In the case of business LOC, the borrower needs to pay interest only on the withdrawn amount.
In the case of invoice financing, the lender offers money and charges interest based on the number of weeks the invoices remain outstanding. Technically, it is a financing option where a lender buys a company’s unpaid invoices at a discounted rate. The lender gets the discount for providing a fee and the borrower gets the remainder of the balance.
Primary benefits of Short term loans:
Short-term loans come with lower total interest payments, as the loan terms are short, mostly about a year. As short-term loans come with a shorter maturity date, these are comparatively less risky. This is because the borrower’s capability of repaying the amount is less likely to change over such a short timeframe. Hence, these loans get processed quickly. Compared to traditional long or medium-term bank loans, these are much easier to acquire, as short-term loan providers are comparatively lenient in terms of credit score requirements.
Why need short-term loans:
To cope with Cash flow issues.
Seasonal businesses often face irregular cash flow issues. To keep the ball running, these types of businesses can opt for short-term loans and acquire funds to continue operating smoothly even in the off-season, when the revenue goes considerably down. However, this type of financing option is ideal for only those business owners who are sure they will earn enough during the peak season to be able to repay the loan on time.
To meet the sudden need of purchasing a business asset or grabbing a lucrative business opportunity.
Business owners often come across situations when they feel the need of purchasing certain goods/assets urgently, to ensure smoother business operations. This is when short-term loans can be considered, as these offer quick approvals and disburse funds within 24 hours. Besides, the qualification requirements are comparatively less.
To pay for emergency expenses.
Short-term business loans are quite beneficial for businesses that need to urgently repair equipment to ensure uninterrupted production/manufacture. This type of financing option offers quick money and enables the borrower to pay for all the emergency expenses.
Process of getting a short-term business loan:
Firstly, business owners, looking to apply for short-term loans, need to understand their business requirements and how short-term loans can benefit their businesses. One needs to gain knowledge of the different types of short-term financing options available and then decide which one will be ideal for his/her business requirements. Secondly, they need to check their credit scores as many short-term business loans need to be personally guaranteed by the applicants. Thirdly, they need to compare multiple lenders and their market reputation to be able to pick the one that has the most lenient eligibility requirement and offers loans with the most convenient repayment terms. Finally, they need to submit a formal loan application and the required documents.