Pros and Cons of Short-Term Business Loans

small business loans Helping your Business Grow Tiangge Philippines

Negosentro.com | Small businesses are almost always in need of extra funding for growth or to merely keep running. The owners depend upon financial resources to hire more staff, add a new product to their company portfolio or pay the emergency bills. The easiest way to get the extra capital for small businesses is through short-term small business loans, either from the Small Business Administration (SBA) or a bank.

Below we discuss some pros and cons to help you determine if this type of financing is right for your enterprise or not.

PROS:

1 – Easy to Qualify

The hardest part of getting a loan is your qualification. However, that’s the best part about short-term business loans, they are easy to qualify for. The requirements are simple, and terms relaxed. New businesses have full chances of getting the loan approved because of these relaxed terms. If your small business has been declared unqualified by the conventional banks, lenders can give you short-term business loans effortlessly. The application process is quick and can be submitted online. Often, proofs of employment, cash, or personal possessions are required.

2 – Quick Funding

The method of attaining short-term loans is quick and uncomplicated. Your loan gets approved in a matter of hours to a few days, unlike other conventional loans, which take up to weeks and months just to get approved. The reason being the limited information and paperwork required for the approval. Owners need to provide a bank statement worth a few months, instead of waiting for days to get financial documents from the bank or going through your entire business history to dig up records. Short-term business loans can be highly beneficial for small business owners having expenses due in the immediate future.

3 – Bad Credit Score? You Still Get the Loan

Good credit history is the key factor for traditional bank loans. Individuals or business owners having a low or even average credit card score find it hard to get their loans approved. It is even more difficult for owners of growing small businesses who haven’t had enough time to build a credit card history to present to the conventional lenders. However, alternative lenders providing short-term business loans are different from your traditional lenders, as they approve your loan application even if you have below the mark credit score. This makes short-term loans the most sought after option for small businesses.

4 – Helps against Seasonal Uncertainties

It doesn’t matter what niche your business belongs to; they all encounter fluctuations. Seasonal uncertainties are inevitable. To keep businesses from suffering too much, a good injection of funding is required. For such circumstances, short-term business loans are beneficial. Due to their non-complexity and speedy process, they can help small business owners keep upright during the seasonal tides. Short-term business loans have limited time duration, which means you have to pay off the debt within a few months. This helps businesses steer clear of piled up debts and bills, as the debt is paid off as soon as the seasonal uncertainties are overcome.

CONS:

1 – High-Interest Rates

Long term roles might be hard to qualify and take longer, but they come with low-interest rates. Short-term business loans charge very high-interest rates, the reason being the period taken to pay off the debt. Businesses applying for short-term business loans are required to pay back within 8 to 16 months. Other factors contributing to the higher interest rates are the applicant enterprise’s credit card history and annual revenue. You might have gotten the loan approved despite your poor credit rating, but you would be paying for it in the form of a higher interest rate. But, through certain tactics, you can also avoid high interest rates.

2 – More Frequent Payments

Long term loans require candidates to make monthly payments, whereas, in short-term loans, the borrowers pay weekly and even daily. Juggling your company expenses and these rapid payments can be a challenge for small businesses. Postponed payments could lead to serious consequences and penalties. Therefore, take a good look at the payment schedule before agreeing to a short-term loan, especially if your company is susceptible to lags and late invoice payments. Otherwise, short-term loans could get you into a never-ending debt cycle.

3 – Potential to Debt:

It doesn’t matter if a loan is easy to borrow or not; they all are equally risky. Generally, loans should only be acquired if they are desperately needed, or if you believe you can pay it back on time. Loans, especially short-term business loans having very little payback time often get borrowers stuck into a never-ending cycle of debts and jeopardize their enterprise’s present and future.

4 – Can Become a Habit:

Because of their simplicity and convenience, short-term loans could easily become a habit. Every time you need capital for your business, the first option popping up in your head would be short-term business loans. If it turns into a habit, you would spend more money than required, and find yourself in a debt that is more than what you can pay back or afford. This can get you into a loop where the money is wasted and as a result, negatively affect your enterprise.

The Final Word

It is important to note that every small business owner has a different business niche. Hence they need different financial plans and approaches. If one type of financing is proved to be beneficial for a particular business, that doesn’t mean it is going to be favorable for the rest too.

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