Business Finance

What You Need to Know About Short-Term Business Loans


Running a business is one of the most hectic things in life. It is almost like nurturing an infant that is helpless in the beginning and needs your ultimate care and attention at all times. To give you a perspective, let’s look into some statistics. According to the World Federation of Exchanges, there were 45,508 listed companies across the world in 2010. However, if you take into account the total number of unlisted businesses, the speculated figure is of 190 million in total. Furthermore, the US Small Business Administration (SBA) reports that about 30% of new businesses fail during their initial two years, 50% fail during their first five years, and almost 66% of businesses fail within the first decade of their birth.

Since it has been established just how exhaustive running a business can be, let’s focus on how businesses survive in such challenging conditions. A lot of companies need a credible source of financing their operations, and this brings us to business loans. While there are a plethora of ways through which a business can raise funds, but due to the restriction of time and space, there is one particular type that is popular amongst new startups. This article gives an in-depth knowledge of short-term business loans. So let’s take a look at just what are they and for whom are they ideal for?

Getting the Basics Right

Investopedia declares that a short term loan is simply a type of business financing through which a firm can borrow money from a lender by qualifying for it first and with a term of less than one year. However, in some cases, these loans can extend up to 1 and a half years, which is roughly up to 18 months. Furthermore, it is believed by many that short term loans are generally acquired to resolve issues about the company’s immediate capital needs. Also, to provide for its cyclical working capital which is required to serve its various on-going and daily operations. However, some entrepreneurs may look at short-term loans negatively. This is because they might be afflicted with payments that can be outrageous to accommodate at times. In simple words, by the time you end up paying back the principle with all the interests attached to it, the final deal may be significantly more costly as compared to the borrowed amount. But this is how any loan works, by adding in interest charges and making the borrower’s life a living hell.

Types of Short-Term Loans

If you thought that short term loans are simply a credited amount that needs to be paid within a year, then think again. Short-term loans have various types and hence comes in different shapes and sizes. Here are some popular types that you must be familiar with:

  • Line of Credit: behaves similarly to a business credit card where a limit is predefined, and the business in need of the amount can use it as such. However, monthly installments come into play against any borrowed amount, and this can vary with respect to the amount that is borrowed from the lender. The interest charges compared to those of business credit cards are substantially lower for lines of credit, which makes them achieve a definite advantage over other types of short term credits.
  • Merchant Cash Advances: these are more like a cash advance; however, they still function as a loan since the borrower needs to make loan payments while offering the lender access to their credit facility. As a result, whenever a customer purchases or makes a transaction with the borrower a specific percentage of that sale amount is given back to the lender.
  • Online Loans: as the name suggests, these loans are applied through online facilities where the borrower needs to fill out a form and get approval for their requested amount. The funds are then wire transferred while the rest of the procedure remains the same as any other ordinary short term loan.
  • Payday Loans: relatively only suitable during the state of emergencies, they are also more likely to be approved as such. This is because the entire loan amount, along with the added interest, is paid to the lender by deducting the amount from the borrower’s bank account using the continuous payment authority, and that is usually when the payday arrives.
  • Invoice Financing: if you know about invoices, they are a business account receivables where the business gets money or earns income. Invoice financing is where the borrower’s invoices are used to pay back the lender’s amount.

What Are The Benefits of Short Term Loans?

Short-term loans are considered one of the most viable forms of financing to this day. Here are some advantages of short-term loans that might help you understand why businesses go after them in the first place:

  • Short term loans last for only a year and a half at most, this means that the total number of interest payments are way lower as compared to longer variations. With these loans, you might get offered a bargain that you do not want to overlook, so always keep your options open when it comes to financing your business needs and requirements.
  • Even though many would argue that the short term loans are a risky business, however on the bright side, borrowers can end up receiving the amount from the lender to generate the funds needed in a much quicker period than compared to long term loans.
  • For small business owners, short term loans can be viewed as valuable time savers, since they are easy to acquire. They can be approved even for those establishments that do not have a splendid credit score. Thus they are absolute lifesavers for those in dire need of financial support.

The Final Word

As a business owner, you should have a sound understanding of various financial options, particularly short term loans; their variations, and benefits. This is what will get you by in case of a financial crisis or during a time of urgent need of capital.