When it comes to businesses, loans are generally used to help achieve goals or even start up a business. A loan is a monetary amount that can help businesses by producing essential cash flow. Loans, in the traditional sense, are taken out by companies when they fall short on a payable amount for business necessities. This includes taking our loans for working capital, equipment purchase, or research and development purposes. Business can have different levels of cash flow necessity and therefore, needs for different kinds of loans.
What is the Difference Between Long and Short-Term Loans?
To put it simply, a long-term business loan is, as the name suggests, a loan that is made for a more extended time period. Long-term business loans usually include a large amount of information and data about your business, its plans, and past, current, and future financial plans. A lot of detail goes into accessing long-term loans as the creditor can be at risk for inserting their money into a business. However, this type of loan can be necessary for businesses planning significant changes or extensions. Long-term loans usually have long payback periods. Multi-year payback periods can last for a very long time; sometimes it can take decades to pay back these loans. While the interest rate on long-term loans is less than short-term ones, the interest ends up being higher due to them longer payback period.
A short-term business loan, on the other hand, may have a higher interest rate for payback periods, but ends up being much quicker and less costly to pay back than a long-term loan. Short-term business loans are generally much easier to secure. They are designed for quick access to short bursts of financial aid, especially geared towards small businesses. They pay off period for a short-term business loan is generally from one to five years. It can be paid off in a lump sum, or installments, depending on the contract and payable amount.
What is the Purpose of a Short-Term Business Loan?
A short-term business loan is helpful in a variety of cases. A short-term business loan can be taken out when a business needs a large amount of money for a short period. A short-term loan can come in handy in case of an emergency, or an unexpected event. For example, a short-term business loan can help in purchasing inventory for a holiday period for a bakery. They will be able to stock up on supplies and raw materials which they can then use to create the materials required to sell. Buying and stocking inventory when they know demand is about to rise benefits the small business substantially. This is mainly an important example as it shows that business expected a demand increase and prepared for it. In turn, they will be able to create a larger than usual profit and pay off the short-term business loan easily after the holiday season.
Another example of a short-term loan during the holiday season, or for special occasions is giving employee bonuses. Businesses, whether big or small, tend to give out holiday bonuses, which can be a great source of motivation and morale for employees. During this time, it is possible that a business may not have enough funds to give all the employees their deserved bonuses. In this case, a business can take a short-term business loan which they can then pay off as the company received cash flow.
How can you get a Short-Term Business Loan?
A short-term business loan is quite easy to source. The lender or creditor will require details for your business, which can range from the profit and losses statement to employee payrolls. The loaner will need to know the borrower’s loan history, including:
- How long it took to pay back previous loans
- Any current outstanding loans
- Complete details of all previous loans
Will you be able to get a Short-Term Business Loan for a Start-Up?
Short-term business loans are much less riskier than long-term business loans, and start-ups have an easier time qualifying for them. Usually, the requirements for a short-term business loan for a start up will include financial statements for the period of the loan, projected cash flow statements, employee records and details of salaries, overhead and rent expenses, etc. The creditor may ask for collateral, which can range from the business owner’s possessions to the business itself.
What About Interest Rates?
Interest rates for short-term business loans can seem hefty. However, they end up being much lower than with any other kind of loan. The higher interest rates are a small price to pay for an easy alternative for a loan. Even though the interest for a short-term business loan is high, the high repayment can be avoided by paying off the short business loan as soon as possible.
Overall, the process for a short-term business loan is much quicker and easier than its alternatives. The time it takes to receive a short-term business loan is comparatively faster than any other type of loan. Even the repayment schedule is on your terms and can be paid back in as little as one month! This can drastically cut down the interest payable on your loan repayment! However, this may be difficult for some businesses as the loan repayment schedule is usually spaced closer together than with other repayments, making the frequency of repayments higher.
Before opting for any business loan, it is imperative that you thoroughly research what the best option for your business is. There are many different loan options but if you are looking for short-term business loans, be sure you find the right place to get one!