What You Need to Know About Short Term Business Loans

By: Paul Raymond0 comments

As your business grows, you will face cash droughts at some point. During these periods, your money will be tight, and you may not be able to meet obligations like paying suppliers or even your employees. To ensure continuous business operations, you will need cash. Short term business loans will come in handy during such times to help you get back on your feet. The word short term may not necessarily mean a short maturity period; it could also mean the different purposes of the loan.  Read on to learn more about short-term loans.


What are short term loans?


Short term business loans are debts with a maturity period of one year or less. If you apply for these kinds of loans, you will have to repay the lender within the one year. Some have shorter repayment periods of 90 to 120 days. The beauty with this kind of debt financing is that it helps you meet an immediate business need without having to make a long-term commitment with the lender.


Benefits of short term debt financing

Short term loans may be perfect for business speculators. If you are an outlet selling children’s clothes and you are anticipating that sales are likely to skyrocket during the holidays, a short term business loan would be your best bet for financing your inventory because you will be able to pay back once the holiday season is over.


These loans may also come in handy if your debtors have not paid their bills. When waiting for your account receivables, you may experience cash deficiencies. This may affect your account payable.  Short term loans will help you even up your cash flows as you wait for your debtors to pay you.


Short term loans may also help you pay your employees and meet other daily expenses especially when cash is tight.


How to qualify for short term debt financing

Just like any other loan, you will have to be eligible for your application to be approved. Your potential lender will have to assess your business to ascertain if you can repay the loan. To qualify, you will have to do the following:

  • Present comprehensive documentation about your business to your potential lender. The documentation has to be in a professional format.
  • If you have had other loans before, your lender will want to see your payment history. Your accounts payable must also be in order for a period of three to five years. You must also have a good and steady cash flow during that time.
  • Your lender may request for your income statement. Ensure that you avail it.

Once the lender is certain that you qualify for the loan and that your business is not a risky one, the lender will then decide to give you a secured or unsecured loan.  Depending on who you choose as a lender, ensure that you understand the terms and conditions well to help you negotiate for a better deal.


The difference in short term and long term interest rates

Interest rates differ depending on the state of the economy. Short term loans on a normal economy, will attract higher interest rates than long term loans. During recession, however, the interest rates for short term loans may be lower than those of long term loans. Your lender will calculate your premium depending on the documentations used to qualify you for the loan to ascertain how much you will pay as premium.


It is important to know the different methods your lender will use to calculate the interest rate and premium. Your main aim should be to have the most affordable loan. Ensure that you have the necessary information so that you negotiate intelligently on your short term loan.


Short term business loans may help you meet your immediate business needs but before you apply for these loans, take note of the following:

  • Apply for these forms of capital as your last resort because they are very expensive. If you are thinking of debt financing as a way of raising capital, go to an investment lender or SBA lenders because they offer loans at affordable interest rates.
  • You can talk to your lender for flexible repayments.
  • Before taking a loan, think carefully on how you will repay this loan. Your income should be higher than your cost of capital.
  • Try and negotiate for longer repayment period. It may make the loan expensive in the long run, but it will not affect your cash flow.

As an entrepreneur, you need to have all the information regarding debt financing. This will help you run your business without entangling yourself in a cycle of debt.

What’s Next?

Call us today and let our business experts help you find a funding option that best suits your company or business.

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