Short-Term Business Loans: The Top Pros and Cons to Consider

Thus, with numerous financing options available, selecting the right loan is crucial.

studio18 September 29, 2022 11:38:25 IST
Short-Term Business Loans: The Top Pros and Cons to Consider

Regardless of the business nature, every business requires sufficient funds to conduct daily operations, expand and diversify. The requirement may involve streamlining working capital during cash flow crunch, capital investment in diversification and expansion, replacing equipment and machinery and more. All the reputed lenders in the market cater to the requirements of the business, but it is upon the borrower whether they need a short-term or a long-term loan.

 Thus, with numerous financing options available, selecting the right loan is crucial. Nonetheless, before planning to apply for a business loan for a shorter period, learn about its advantages and disadvantages in detail.

Top Pros and Cons of Short-Term Business Loans

A short-term business loan, referred to as a bridge loan, is a type of financing option designed to address a small business’s capital requirements for a brief period. Such credit facility provides financial assistance to cover short-term monetary crises, such as uneven cash flow or seasonal business requirements.

Another important thing to know before seeking to apply for a business loan for a shorter period is that it can be acquired as a secured or unsecured credit option. Nonetheless, here are some of the crucial pros and cons of short-term business loans:

Pros:

  • Managing seasonal demands

Some businesses witness highs and lows depending on seasonal products and undergo financial issues as the products are sold only during a certain season. In case the seasonal products remain, it becomes a dead stock. Hence, short-term loans can be borrowed to manage the business expenses to camouflage the loss for the rest of the year.

Moreover, in case of technical breakdown, equipment repair or connectivity issues, short-term loans can be beneficial to help during emergencies.

  • Hassle-free processing

Unlike the traditional application of short-term loans, small business loans are much more convenient. The documentation involving small business loan applications is minimal. Just some of the basic personal and business loan documents are sufficient to ensure prompt loan approval. Due to this, businesses requiring immediate capital can conveniently secure short-term loans within a few hours or days. However,  this proves as a stark contrast to many traditional lenders who often take a few weeks or months to approve the deal. 

  • Easy qualification of loans

One of the most evident benefits of a short-term business loan is that it is much more convenient to qualify for. Usually, traditional loans come with strict eligibility parameters that are difficult to meet for new businesses. However, small business loans come with flexible norms to assess business and personal credibility. 

The applicant must always check the business loan EMI beforehand to avoid any financial burden during the repayment tenure and plan finances efficiently. Moreover, young businesses with shorter business vintage can be eligible for these loans.

  • Quick funding

With the availability of different lending institutions and other lending platforms, short-term business loans can be approved within 48 hours. Contrary to conventional business loans from reputed financial institutions that can take various days and weeks to get approval and get funding, short-term business loans provide prompt access to capital within a few hours. Therefore, one can apply for a business loan as a suitable choice for businesses requiring capital requirements.

Cons:

  • Higher interest rate

Due to the shorter period of time, short-term business loans attract higher interest rates and charges. When compared to long-term alternatives, these credit options pay considerably more in exchange for a similar financed amount. Moreover, with easy processing, less rigid eligibility and quick release of funds at the cost of higher business loan interest rate on short-term business loans.

  • Recurring payments

Another significant limitation of such credit options is that these loans require periodic payments. In contrast to a long-term business loan with monthly payment options, most short-term options involve weekly or daily payments. This recurring payment could create a risk of being debt trapped if your business is prone to cash flow fluctuations. Moreover, it can leave one burdened with penalties and the risk of default.

  • High default risk

These short-term business loans are acquired to fulfil emergency financial requirements. Usually, these loans involve higher EMIs that are required to be paid within a specified brief period of time. If one fails to make payments on time, it can put one’s business in danger and get oneself into a debt trap, thereby depleting his/her resources in repaying debts instead of investing in growth.

  • Impacts credit score

Missed or delayed payments can bring down your credit score, significantly impacting one’s repayment record. This can further create problems for borrowers in future loan approvals. However, by maintaining a healthy credit score and making repayments on time, you can negotiate with a lender to avail a better interest rate because different lenders offer business loans at different interest rates.

Applying for short-term loans from reputed financial institutions is quite simple and hassle-free. Furthermore, you can manage short-term loan accounts online and check important details like EMIs, interest rates and repayment tenure from anywhere at your convenience.

Stepwise Application Process of Short-term Business Loan

Due to the above-mentioned pros, intending borrowers can apply for a business loan  in a few simple steps. Nonetheless, take a look the steps to apply for the loan and secure quick approval:

Step 1: At first, visit your chosen lender’s website.

Step 2: In the application form, input your name and phone number and verify the OTP.

Step 3: Share your basic personal and business details along with necessary documents

Step 4: Upload your financial documents of last 6 months

After submitting the form and detailed verification one of the lender’s representatives will contact you for further loan proceedings.

Therefore before planning to apply for a business loan for a shorter or longer period of time, it is always wise to compare a range of offerings to determine the most suitable one that best fits your borrowing requirements. Short-term business loans can be beneficial during emergencies; however, it always comes with a price.

This is a Partnered Post.

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