Short Term Business Loan – Pros and Cons For Your Business
A short term business loan provides a company the necessary working capital to resolve a financial issue where the repayment term is normally 12 months or less. While the working capital is intended to cover a short-term cash-flow issue, for example an unanticipated purchase or expense, it may also serve as a transition to long-term permanent financing or as a bridge to external third-party investors. Since a short term business loan can be relatively expensive and needs to be repaid in a short period of time, it can create a significant financial burden for your business.
Let’s review what is a short term business loan, its potential uses and pros and cons to see if it is right for your business situation:
What Is A Short Term Business Loan?
A short term business loan is a type of business loan that provides your company with quick working capital. Like a traditional bank loan, you receive a lump sum of cash upfront which is repaid to your financial lender over a set period of time, normally 6 – 18 months. Your payments may be daily, weekly or monthly and will include the loan principal borrowed, interest and any lender fees. Since the repayment period is shorter than a traditional bank loan, the amount that a business can borrow is smaller (from $50,000 to $500,000) and since it is considered a higher-risk type of financing, normally more expensive. A short term business loan is classified as a current liability in your business Balance Sheet report .
According to the SBA, 39% of businesses close either due to low sales or cash flow issues. A short term business loan is short term capital intended to circumvent a business cash flow issue before it becomes a major problem for your business.
What Is A Short Term Business Loan Used For?
A short term business loan is used for a variety of purposes where the determinant is the perceived need of short term capital. This perceived need should be balanced with the anticipated return versus increased debt burden to the business:
- Purchase Inventory – return on investment (ROI) decision
- Make Payroll – the business owner needs to find any source of capital to pay the personnel
- Bridge Transition – short cash flow, the business owner has a means to pay vendors to keep operations flowing
- Tax Obligations – negotiate terms and pay the tax man to avoid a lien on the business
- Special Investment – short cash flow, critical purchase of supplies, equipment or promotion (ROI decision)
- Emergency – businesses have unplanned surprises and related costs that need to be resolved
Is A Short Term Business Loan Right For Your Business?
It depends on a your response to a variety of basic business questions:
- WHAT will the working capital be used for? Your financial lender will ask this question as part of the approval process. You need to be specific so that it is clear what is required to accomplish your business goal. Example: Pay payroll.
- HOW MUCH working capital is required? There is no sense to go through the financing process unless it is sufficient to accomplish your business goal. Example: $10,000.
- WHEN does the business need the working capital? This will help you select the type of financial lender and financial product. Timing is everything in business. Example: 10 days.
- Can your business AFFORD the cost of working capital? Since this is short-term capital, the ability of your business to make the repayments is highly dependent upon your anticipated monthly sales during the term of the loan. You should take a very conservative view of cash flow projections and anticipated return on the capital. Example: Need at any cost.
- Is there an ALTERNATIVE to increasing your business debt? If you can improve your existing cash flow by renegotiating with creditors or secure additional capital via a third-party angel investor, this might be an alternative to increasing your business debt.
Pros: Fast Business Capital | Quick Approval | Solves Cash Flow Issue | Allows For Unexpected Business Opportunity
Cons: Increases Business Debt | Higher Cost For Capital | Increases Cash Flow Payments
Short Term Business Loan – Conclusion
A short term business loan provides working capital to resolve a business cash flow issue for a relatively short duration of time. While the working capital can be used for a variety of business benefits, the owner should clearly review the specific need, amount, timing and the ability to repay the loan during the payment term. Depending upon your business situation, this financial solution may fit your business needs, now or in the future.
Please call us at (888) 213-3383 to help review which financial product best serves your business needs or Contact Us via Email.