When should you apply for a short-term business loan?

If you are a small business owner, there are many reasons why you may consider applying for a Business Loan. Perhaps, you are attempting to get your company off the ground or grow it to the next level. It is also possible that you are trying to address some short-term cash flow problems. In that case, you may opt for short-term company loans.

This is particularly applicable when a long-term loan is not the ideal option for your business requirement. For example, borrowing money to enjoy the benefits of a steep discount on quick-turnaround inventory is not the same as borrowing to buy a new warehouse. Most individuals would not buy a new car with a 30-year loan, as the accumulated interest would make the car's total cost unreasonably high. Instead, you might want to look into short-term Business Loans to help you handle your short-term requirements. 

Here's everything you need to know about short-term Business Loans.

What is a short-term Business loan?

A working capital loan, often known as a short-term Business Loan, is meant to give small business owners immediate access to the working capital they need to handle short-term financial challenges. Any loan having a tenure of three months to three years is considered a short-term loan. Short-term Business Loans can help in both instances if your company is facing cash flow problems or has an opportunity to take advantage of a lucrative offer.

How does a short-term Business Loan work?

As mentioned above, short-term Business Loans are similar to typical Business Loans, except that they have shorter repayment durations. Short-term repayment durations often range from three months to three years, but they are usually less than 12 months. Shorter repayment terms not only result in larger monthly payments, but short-term Business Loans may also have more frequent payments.

With these loans, you get the borrowed funds as a lump-sum payment, just like any other term loan, and then are expected to repay it over the loan's tenure. However, in some instances, you may be able to obtain a revolving line of credit. Most modern lines of credit have a set period, but unlike a term loan, you can use your line of credit to the extent that you need it, whenever you need it, and then pay back what you have borrowed. You are allowed to use the limit over the credit line's term after repaying the amount borrowed previously. Additionally, you only pay interest on the credit you use, which can be greatly beneficial in terms of financial costs.

Further, while traditional instalment loans are typically repaid every month, short-term loans may require weekly or daily payments. Short-term loans are more likely to fall into refinancing or debt trap because of these qualities, wherein the borrower is repeatedly renewing a loan to reduce and delay payment while incurring interest.

When should you consider applying for a short-term Business Loan?

A short-term Business Loan may be beneficial or even necessary in a variety of situations. If you're dealing with any of the following challenges, you might want to look into short-term Business Loans:

• Cash flow issues: Some firms are more vulnerable to cash flow problems in the short term than others. If your company is experiencing seasonal slowdowns or other recurring cash flow challenges, a short-term loan may be able to help you keep production going and pay your employees during those low-revenue months. The key is to ensure that you will be able to pay back the loans when they are due.


• Business opportunities: A short-term Business Loan may be the answer if your company is presented with a lucrative opportunity that urgently requires funds to materialize. Approval and funding timelines are generally shorter than with traditional loans—as quickly as 24 hours in some cases—and the terms are often less stringent. However, this sort of financing should only be employed if the financed opportunity has the power to enhance sales or otherwise benefit your company's bottom line.


• Unexpected expenses: Expenses can't always be avoided, and they can't always be delayed until you have ready cash. If your company is facing unexpected needs such as building, equipment, or fleet maintenance, short-term Business Loans can help you sail through tough times.

When to avoid taking a short-term Business Loan?

The abovementioned scenarios warrant a short-term loan. This sort of financing, on the other hand, is not suitable for businesses that are unable to repay the loan swiftly. Here are a few scenarios where you should avoid taking a short-term Business Loan:

• Unable to make payments: If you're low on cash and need a short-term loan to cover operational expenses, go deeper into your company's finances and budget before borrowing, especially if this is a regular affair. Examine whether the loan funds will boost the company's sales or enhance its financial situation and ability to make payments. Then, figure out how much you can reasonably afford in monthly (or weekly) payments, and choose a loan that meets your budget.


• High APRs: Short-term loans may have higher Annual Percentage Rates than their long-term counterparts. This is because the criteria are less demanding and the loan is processed more quickly. Individual payments and the overall cost of borrowing might be significantly increased by a high APR. You may want to avoid such loans, if possible.


• Risk of debt trap: Business owners might easily fall behind on loan repayment due to shorter repayment terms and hefty monthly payments. This frequently leads to the refinancing of a short-term loan to lower as well as delay payments. While loan refinancing might be a good approach to cover unexpected costs, it can also lead to a debt trap in which monthly loan payments surpass the company's ability to pay.

To conclude

A short-term Business Loan can be a viable option for businesses that need financing to counter working capital fluctuations, take on big opportunities, and meet operational needs. Poonawalla Fincorp offers a wide array of business loans including short-term Business Loans. The application and disbursal process is quick and hassle-free. Head over to Poonawalla Fincorp’s website for more details.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply