Short-term business loans can fund a business’s diverse set of needs. Like what? Through these loans, you can maintain a steady influx of capital, reduce operational costs, scale production, and much more.
But every financial product must not only be seen in a positive light, as that paints an incomplete picture. A critical evaluation of short-term loans is also necessary. So, let’s start by understanding what this loan entails and move on to discussing its pros and cons.
What is short-term business financing?
A short-term loan is a lump sum credit extended for a short tenure that can go up to 3 years or slightly more. These loans are also easy to acquire, given their relaxed business loan eligibility criteria, and require a moderate credit score.
Pros of short-term business financing
Here are the top pros that make a case for short-term loans:
1. Quick processing
Applications for short term loans are usually processed faster. In some cases, as fast as a couple of days. This benefit comes in handy, especially when you’re strapped for cash and require funds urgently.
2. Open-ended business use
Not only can you fulfil your working capital needs through this loan, but you also fund several other aspects of your business. Be it increasing your inventory, hiring new staff, purchasing machinery, relocating business, or expanding marketing efforts; short-term loans can cover them all. They don’t come with a restricted end-use.
3. Relaxed short-term business loan eligibility criteria
More often than not, short-term loans are easy to qualify for. A simple online search can help you find a lending institution with relaxed eligibility criteria. What’s more, you’ll also be able to apply for this loan online and with minimal documentation.
4. Become debt-free sooner
With this loan type, you end up being debt-free quickly. How? Since you can’t avail of short-term loans for long tenures, you can close them within 2 or 3 years.
Cons of short-term business financing
Here are a few cons of short-term business financing:
1. The ‘seasonal borrowing’ trap
Since these loans are readily available, you might be tempted to borrow them repeatedly. While this is not a direct con of short-term loans, it is worth mentioning.
2. Moderate to high business loan interest rate
Considering you can avail of short-term business finance without pledging collateral, these loans usually feature a slightly higher interest rate than long-term loans. However, if you already have an excellent loan repayment history, and therefore, a high credit score, you may get approved at affordable interest rates.
3. Repayment frequency
Considering this is a short-term loan, you may be required to make weekly or daily payments rather than the usual monthly ones. However, this won’t be as difficult if you know how to manage your business cash flow well.
The bottom line
As you can see, there are both upsides and downsides to short-term business loan. So, you can decide on the loan depending on your needs. Just make sure to calculate your potential EMI using a business loan EMI calculator before you apply, and your application process will go smoothly.