Short Term Business Loan

In today's rapidly changing business world, small companies drive economic growth and foster innovation. However, these ventures often need financial support to pursue their dreams and keep their operations running smoothly. This is where short-term business loans come in, serving as a lifeline for small business owners. These business loans online are designed to provide quick and easy capital to meet immediate financial needs, making them an attractive option for businesses dealing with cash flow problems or looking to grow.

However getting an online business loan can be challenging. Small business owners face various challenges in the process with traditional lenders. This includes strict eligibility requirements, lots of paperwork, high-interest rates, and demands for collateral. However, with the advent of technology and the arrival of new-age lenders, short-term business loan products have evolved completely. Let's understand this financial product in detail.

What is a Short-Term Loan?

A short-term business loan is a financial product designed to provide quick access to funds for your business. Thus an online business loan typically has a shorter repayment period, ranging from a few months to a year, making them ideal for meeting immediate financial needs or addressing short-term cash flow challenges.

So, when is it ideal for you to obtain a short-term business loan? Let's explore some situations where such an online business loan can benefit your business.

1. Bridging Gaps: Small businesses often face fluctuations in their cash flow, with payment delays from customers and regular financial obligations to meet. In such cases, a short-term online business loan can help you bridge the gap between income and expenses. It ensures you continue your operations without disruption.
2. Unexpected Expenses: These expenses are part and parcel of running a business. Access to this loan provides the necessary funds to deal with unexpected repairs or equipment replacements.
3. Seizing Opportunities: Opportunities include bulk purchasing discounts, limited-time offers, or securing essential inventory to meet a sudden spike in demand. A short-term online business loan enables you to seize such opportunities without delay.
4. Business Expansion: If you plan to expand or open a new location, you might need extra funds to cover setup costs, initial inventory, or marketing efforts. A short-term business loan can provide the necessary financial boost to facilitate a smooth expansion process.

Different Types of Short-Term Loans

Short-term small business loans come in various forms, each tailored to specific requirements. Here are some of their types. 

1. Overdraft

An overdraft loan is a type of short-term business loan that allows you to withdraw money from your bank even if the account balance is zero or below. It is a form of short-term credit that you may use for business emergencies or urgent needs. You need to pay interest on the amount overdrawn, not sanctioned, and repay it within a specified period.

2. Merchant Cash Advance 

It is a simple way for small businesses to get money when they need it urgently. Under MCA, repayment is a small percentage of your daily credit and debit card sales instead of paying fixed monthly instalments like in a regular online business loan. That means when sales are good, they pay more. When sales are slow, they pay less. It is a popular option for businesses that might not qualify for traditional business loans online because of limited credit history or other reasons. 

3. Invoice Financing

When you provide goods or services to a customer, you issue an invoice for payment. But sometimes, customers take time to pay, which might create cash flow problems for your company. You can sell these unpaid invoices to a financial institution at a discounted rate with invoice financing. 

The lending institution then pays you a percentage of the invoice value upfront. Once the customer pays the full invoice, the lending institution deducts their fee and transfers the remaining to your business account. 

4. Trade Credit

This short-term business finance is like buying things on a "buy now, pay later" basis but for businesses. This online business loan kicks in when you buy goods from your supplier without paying for them immediately. Instead, you agree to pay the supplier at a later date, usually within 30, 60, or 90 days. 

5. Business Credit Card

It functions much like a regular credit card. But it is specifically tailored to handle business-related transactions. You can use it to buy things your business needs, like purchasing supplies or paying bills. Many business credit cards offer rewards, cashback, or travel perks, which can benefit your company. However, be responsible with your spending. Repay within the interest-free period to avoid accumulating high-interest debt.

6. Working Capital Loan

This short-term business loan is specially designed to cover your day-to-day operational expenses. It helps you manage your business's short-term financial needs, such as buying inventory, paying salaries, or handling unexpected costs. The final online business loan amount depends on your company’s underlying securities. The repayment tenure of these business loans online can go up to 3 years.

7. Cash Credit 

It is a financial facility banks offer to businesses like yours. It works like a short-term loan where the bank sets a credit limit based on your business's creditworthiness. You can withdraw funds up to this limit whenever needed. Interest is applicable only on the amount withdrawn. You have the flexibility to repay and redraw within the sanctioned limit. It is an excellent way to manage your working capital.

Short-Term Loan Eligibility Criteria

Short-term business loan interest rates and eligibility criteria differ among lenders. Most lenders consider the following parameters to proceed with your application.

1. Business's Financial Health

When you apply for a short-term business loan, the lender will check how financially healthy your business is. They will look at your past profits, expenses, and debts. If your company has been making good profits and has managed its costs well, the lender may approve your online business loan application immediately. Usually, a monthly business turnover of Rs 2,00,000 is sufficient to obtain these business loans online.

2. Credit Score and History

Your credit score is like a report of how well you have managed your previous online business loan and debts. A high credit score means you have paid back business loans online on time, which can lead to instant approval and a lower short-term business loan interest rate. On the other hand, a low credit score may result in a loan denial or funding at a higher interest rate because the lender perceives you as a riskier borrower.

3. Loan Amount and Tenure

The amount of money you want to borrow and the time you need to repay it can also impact the funding approval and short-term business loan interest rate. Usually, larger amounts for business loans online or longer repayment periods carry a higher risk for the lender. But before choosing the repayment tenure, remember that shorter term increases the EMI. Use a business loan EMI calculator to ensure your monthly obligations are within your budget.

4. Business Vintage

The vintage of your business is like its track record. Lenders consider how long your company has been running to assess its credibility and stability. If your business has been operating for a longer time, say five years or more, it indicates that you have experience managing the market's ups and downs. This can give lenders more confidence in your ability to repay a short-term online business loan, leading to the possibility of quick approval and a lower interest rate. The good thing is that even a business vintage of one year with other satisfactory parameters can help you get approval for a short-term online business loan with FlexiLoans. 

5. Business Type

Lenders consider different types of businesses to have varying levels of risk. Some industries or sectors might be more stable and have a lower risk of financial challenges. In contrast, factors like market volatility or seasonality could render others riskier. For instance, lenders might perceive a business engaged in essential services like healthcare as having lower risk. Given this, they may get quick approval with a lower interest rate. Conversely, uncertain sectors like hospitality or real estate may receive a higher short-term business loan interest rate or sometimes face online business loan denial.

What are the Documents Required for Short-Term Business Finance?

The necessary documents for a short-term online business loan can differ depending on the financing product and the specific lender you approach. Below are the most common requirements:

Benefits of Short-Term Business Loans

Short-term loans can be a valuable financial tool. It offers several benefits to help your business grow and succeed. Let us explore some of their advantages.

1. Quick Access to Funds

Short-term business loans can be a lifesaver when you need money fast to seize a growth opportunity or handle unexpected expenses. Unlike a long-term online business loan that take a long time to process, a short-term online business loan gets approved quickly, and you'll get the money in your hands faster.

2. Easy Repayment

Paying back a short-term business loan is hassle-free. You may opt for a repayment period that suits your business cycle so that you won't feel burdened by long-term debt. This flexibility helps you manage your finances and focus on growing your business.

3. Less Paperwork

Applying for a short-term business loan does not involve mountains of paperwork. The process is simple, and you won't have to waste time gathering unnecessary documents. That means less stress and more time to concentrate on your business.

4. Better Cash Flow Management

Keeping your business's cash flow steady is crucial for success. Short-term loans can help you during cash flow gaps, ensuring you can pay your suppliers, manage payroll, and cover expenses without worries. This stability allows your business to run smoothly.

5. Building Credit Score

A good credit score is essential for future borrowing needs. You can establish a positive credit history by taking short-term business finance and paying it back on time. A solid credit score increases your chances of getting larger business loans online in the future when your business needs them.

6. No Collateral Needed

Short-term business loans often do not require you to pledge collateral. That means you won't have to risk your valuable assets to secure an online business loan. It's a safer option for you and gives you peace of mind.

7. Support During Off-Peak Seasons

If your business experiences seasonal fluctuations, short-term loans can provide the necessary support during slow periods. They give you extra capital to keep your business running until the busy season returns.

Mistakes to Avoid when Applying for Short-Term Loans

Some common mistakes that you as an entrepreneur should avoid when seeking a short-term business loan are as follows.

1. No Research

One of the biggest mistakes is not conducting thorough research on available options for business loans online. Many financial institutions and online lenders offer short-term business loans in India, each with varying terms, interest rates, and repayment conditions. You must explore different options to get better deals and a loan that suits your business's needs.

2. Overborrowing

When applying for a short-term small business loan, borrowing more money than required might be tempting, especially with a pre-approved offer. However, overborrowing can increase interest payments and create unnecessary financial burdens. Carefully assess your business needs before submitting your application.

3. Overlooking the Fine Print

Reading and understanding the agreement's fine print for business loans online is crucial before signing any contract. Knowing the interest rates, repayment terms, late payment penalties, and other terms and conditions is essential. Ignoring these details may lead to surprises later, impacting your business's financial stability.

4. Failing to Check Eligibility Criteria

Lenders have specific eligibility criteria for short-term small business loans. Applying for a loan without meeting these criteria wastes time and can negatively affect your credit score because of hard enquiries. 

5. Not Having a Repayment Plan

Taking a short-term business loan without a solid repayment plan can lead to financial stress and missed payments. Calculate your monthly income and expenses to meet the loan repayment schedule comfortably. It is best to utilise a business loan EMI calculator.

6. Applying with Multiple Lenders

While exploring options for business loans online is essential, submitting multiple loan applications at once can harm your credit score. Business loans online application triggers a hard inquiry on your credit report, which may raise concerns among potential lenders about your financial stability. Instead, research lenders first and choose the most suitable one to apply to, avoiding unnecessary credit checks.

7. Inaccurate Information

When applying for short-term business finance, ensure that all the required documents and information are accurate and complete. Any discrepancies or missing data may delay or reject your loan application. Double-check all the details to maintain credibility with the lender.

Short-Term Loans versus Long-Term Loans

Short-term business loans and long-term business loans online are two distinct types of borrowing options, each with its own characteristics and intended uses. Here is a brief comparison between the two:

Conclusion

While short-term business loans offer convenience and flexibility, exercising caution and borrowing responsibly is essential. Evaluate your business's financial situation and only borrow the amount you genuinely need to avoid unnecessary debt. Timely repayments are vital to maintaining a healthy credit history, which can benefit you in the long run, facilitating smoother approvals for business loans online and access to better financial opportunities.

Frequently asked questions