Short Term Business Loans: The Basics
If you’re a business owner worried about experiencing a cash shortfall, it may be time to consider the benefits of short term business loans. While these loans often carry higher interest rates and associated fees than traditional long-term business loans, they are more flexible and can allow you to be fast on your feet when undertaking business decisions. In addition, short term business credit can be less expensive than other short term financing options. Understanding the basics of how they work and when to use them will help you decide if this type of loan is right for you.
When to Use Short Term Business Loans
A short term loan may help a small business owner survive income hiccups and poorly-timed expenses. After all, even when income isn’t streaming in on a regular schedule, there are still routine and perhaps unexpected bills to be paid, including payroll. A short term loan may help smooth cash flow for merchants who purchase stock from suppliers weeks or even months before selling the merchandise. Gaps in inventory, unexpected costs, and the opportunity to make a large capital purchase (such as a good deal on an expensive piece of equipment) are also examples of situations in which business owners may want short term business loans.
The purpose of the loan helps determine the amount borrowed and the loan’s term. Short term business loans are usually paid off within three years, though they come due in just 30 to 90 days, depending n the loan’s purpose.
What to Watch
Some extremely short term business loans don’t require regular monthly payments. Instead, they are payable in full when their terms expire. Because the loan has a specific purpose, lenders may have detailed repayment terms, such as paying in full with interest upon the receipt of all accounts payable.
Other lenders offer borrowers the opportunity to make automatic daily payments to reduce the principal balance faster. This may be useful for businesses with cash flow issues as it’s less financially disruptive than an additional monthly bill or a large lump sum repayment.
Applying for Short Term Business Loans
While long-term business loans are usually secured by long-term collateral like real estate or expensive equipment, short term loans are most often unsecured or backed by liquid assets like accounts receivable. This means the lender is at greater risk if you default — after all, there may be no collateral or receivables may turn out to have little value if uncollectible. That’s why the lending institution will pay extra attention to your personal credit history and score — make sure it’s as strong as possible before applying. In addition, expect to answer questions and document your business’ cash-flow history and other financials.
Improving Your Credit Rating and Your Bottom Line
Obtaining (and successfully paying off) a short term business loan may make your future long-term loan applications more successful, because you are establishing a stronger business credit profile. Make your search for a suitable loan more efficient by reviewing your options through LendingTree’s Small Business Loans page. And when you’re ready to apply, simply visit Lending Tree to complete your application online and compare offers in minutes.