Finding the right method to procure financing is essential to keep your business thriving. It is an imperative element for small businesses to maximize their potential profits by maintaining a healthy influx of capital. The proper allocation of funds through apt means helps businesses drive growth in the right direction. However, every business is different and so are their capital requirements. A particular type of financing might work well for one while may not for the other. Similarly, some businesses may require capital for the long term whereas some may suffice their needs through short term business finance. Thus, with plenty of financing options available finding the right loan type has to be a cautious choice. In view of this, we have summed up the pros and cons of applying for a short-term small business loan, so that you can effectively determine whether this financing facility suits your business requirement or not.
What is a short term business loan?
A short term business loan also referred to as a bridge loan is a type of financing tool designed to address capital requirements of small businesses for a shorter period of time. These loans basically cover the financing needs during short terms monetary crises such as in instances of uneven cash flow issues or seasonal business requirements. The repayment duration for these loans is much shorter as compared to their long term financing counterparts. However, the short term business loans are considered to be the most suitable for SMEs and startups as during this stage of the business obtaining traditional loans can be difficult. Additionally, another good thing about these loans is that they can be either obtained as a secured or an unsecured loan facility.
What Are the Pros and Cons of Applying for Short-Term Business Loans?
Pro: Smooth Process
Unlike traditional loans applying for a short term, small business loans are much easier. The application process for these loans is typically online-based; thereby they do not require scheduling meetings with the lender or putting in humongous paperwork. Due to all these factors, the application process for short term business loans can be completed in as little time as possible, from the comfort of your home.
Pro: Quick Funding
Thanks to online lending platforms such as FlexiLoans, short term unsecured business loans can be now approved within 48 hours. Contrarily, to traditional business loans from banks that take several days and weeks to get approved and release funding, short-term business loans provide quick access to capital within hours. This is possible due to less stringent procedures involved in loan documentation. Thereby, the short term business loans are a suitable choice for businesses having immediate capital requirements.
Pro: Easy to Qualify
One of the most obvious benefits of short term business is that it is much easier to qualify for. These loans follow relaxed norms to assess your personal and business credibility. Even young businesses with shorter business history can easily qualify for these loans.
Pro: Handles seasonal uncertainties
Irrespective of industry your business belongs to- it is likely to encounter fluctuations in demands. Seasonality may affect your business drastically. Without the proper injection of capital, these instances could lead to bringing down your earnings. Therefore, to cater to such seasonal uncertainties short-term business loans comes in handy. By providing quick access to capital they help you tide over seasonal dips.
Con: High-Interest Rate
Due to the short loan duration, short term business loans attract a higher interest rate and charges. When compared to other long term alternatives these loans make you pay significantly more in exchange for the same financed amount. The easy processing, quick disbursal, and less stringent eligibility all come at the cost of a higher interest rate on the short-term business loan.
Con: Require frequent payments
Another notable limitation of short term business finance is that these loans require you to make frequent payments. Contrary to long term business loans that have monthly payment options, most of the short term business loans require weekly or daily payments. This hasty payment could pose the risk of being debt trapped, especially, if your business is susceptible to cash flow fluctuations. Moreover, it could leave you burdened with penalties and risk of default.
Con: Potential to Debt
The short term business loans are procured to fulfill emergency monetary requirements. Generally, these loans have higher EMIs that are required to be paid within the specified short time limit. Failure to do so could jeopardize your business’s growth and put you in a debt trap, eventually causing your resources to deplete in paying back debts instead of investing in growth.
The Bottom Line
The short term business financing comes with its own shares of pros and cons. It is not always the right solution for every business owner. Before arriving at decision all aspects of the business should be considered and analyzed. Sometimes, the benefits associated with short-term financing may outweigh its limitations; however, it is important to understand whether this loan facility fits your business scenario or not.
Nevertheless, if your business has quick cash flow cycles, a reliable payment source and requires an immediate infusion of capital, then a short-term small business loan might be the precise financing solution for you. Thus, whether or not this loan facility makes sense for your business will largely be determined by your business conditions and characteristics.
To get started, apply for transparent business loans with FlexiLoans today.