Does the thought of paying a lender for decades makes you cringe? If so, it’s worth exploring what is an advantage of a shorter term loan. Some of them have a bad reputation as funding for newbies or those with bad credit. In reality, businesses of all levels and types can reap benefits of short term financing. Here’s what it can do for your business.
Your options for business loans aren’t as wide when your credit isn’t the greatest. Whether you’re a startup or rebuilding, banks don’t view your situation much different. You need to show business credit history and most often a personal guarantee. Taking out a short term loan will help position you to approach traditional lenders. After proving yourself, you’ll have the financials they request.
When you use short term loans the terms are shorter. That means you’ll pay the loan back in months or a few years versus several years. Lenders will report your loan activity, which is good for your credit report. It will show that you were successful at paying back the loan within a small window of time. Proving you can manage loans widens your opportunity for other loans.
Debt is a necessary function in business. A growing business will always have projects to fund. Using financing will help keep your own capital free. That doesn’t mean your business must remain a slave to debt forever. Using shorter term loans may increase your payments, but it also reduces your time. Funds you’ve dedicated to the bill each month can soon work in other areas of the business.
What is an advantage of a shorter term loan? For some, it may be less stressful than term loans. They may find peace in knowing they’re not tied to that responsibility for the long haul. Planning for a business still doesn’t give you definite information about where it will be in the next 10 years. So it may make more sense to some to keep debt obligations short and sweet.
Traditional loans and longer terms may offer lower interest rates. Sometimes lenders charge more interest for loans that don’t require collateral. That doesn’t mean you can’t save more money with a shorter term loan. A 20-year loan may have a fixed 5% interest rate. A short term loan may have a 12% interest rate and 24 month terms. Overall, which one costs more?
You may even be able to find a good deal on a short term loan. Some offer low or no interest if you pay the funds back within a certain period. Business credit cards may also have an introductory 0% APR. Cutting down the time on your business loans can work in your favor a few ways. You’ll shorten the time you’re paying interest and reduce the amount of interest you gain.
Different types of loans serve different purposes. In business, there are loans for certain resources and supplies. Businesses at different levels qualify for certain types of loans. Lenders can also supply funds based on certain assets the business has. Short term funding like unsecured business lines of credit or business credit cards work better over other sources in some cases.
For a quicker, easier approval process
When thinking about what is an advantage of a shorter term loan, the wait time for funds is a huge one. Short term loans usually have a less painful application process. You’ll have less forms to complete. Lenders also have less questions and documentation requirements. The approval is fast, you get the cash fast, and repayment terms are short.
For short-term investments
Short term funding is not something to use on investments with a long, drawn out return. You can still definitely use it to bring money into your business. Taking out a short term loan to pay for advertising or get supplies makes sense. Those are actions that will immediately bring revenue back into the business. Just make sure the loan interest doesn’t outweigh the return.
To meet temporary cash flow needs
Business cash flow will always fluctuate throughout the months and seasons. You can aim for a certain level of available cash, but not everything is predictable. If your cash flow ever gets dangerously low, it may be time to access a short term loan. Unsecured business lines of credit work well to help with temporary cash flow needs. You have a limit that allows you to borrow and repay as little as you need. It’s a flexible option for a temporary need versus paying long after your cash flow problem is gone.
What a short term loan shouldn’t be is an option to try to save your business. BM Magazine suggests a declining business focus on improving sales instead. Trying to use a short-term loan to save a drowning business might do more harm than good. Unless revenue improves, you may find yourself unable to repay the debt.
Suppose your business caught it’s big break. You finally got a huge order that will put your business ahead of your financial projections. The only problem is you need resources to fulfill the order. Supplies, temporary workers, and funds to pay for both. If only you could borrow the money and pay it back once you meet client needs and the check clears. That’s where short term funding comes in.
There’s no need to take out a 15 year loan for an order with a quick turnaround. When questioning what is an advantage of a shorter term loan, think about your business. Short term financing is perfect temporary funding to boost business revenue.
Not all short-term business loans work in the borrower’s favor. Some are glorified cash advances or payday loans. High interest and fees will make the risk more than the benefits are worth. Be cautious when researching what is an advantage of a shorter term loan. You should also be selective when settling on your funding solution.
If you’re looking to benefit from a shorter term loan, know that we designed our site with you in mind. Financial experts created Business Financing Hub as a resource for entrepreneurs and small business owners seeking financing. On our site, you can learn all about building credit and getting financing. Once equipped with information, you can apply for credit cards for short term lending needs. You don’t even have to leave our site to do it.