When running your own small business, there are challenges that you will face, that might require you to seek help in the form of finance. There is a huge range of loans to choose from that could benefit your business, from equipment loans to lines of credit, but what about if you’ve not yet had the chance to build up a solid, healthy credit history? This is where short-term loans can come in useful. These loans are typically easier to obtain and maintain more lenient requirements so your business can benefit from additional capital no matter your credit score. Read on as we take a closer look at short-term loans, as well as their pros and cons.
What is a short-term loan?
A short-term loan is one of the many ways in which you can help your business with additional finance when you need it most. A short-term loan is generally paid off over a term of around three months, to two years depending on the loan amount and lender you choose. There are a few ways in which short-term business loans can be used, for example, you could use them to expand your business, help with the hiring process, or update your business premise. They could also be used to improve your cash flow if you’re faced with an emergency bill or expense that your income cannot cover comfortably. The terms of your short-term loan can differ depending on the lender you choose, so it’s best to do a bit of research before making your decision on which will suit you best.
What are the benefits for businesses?
So, why do businesses use short-term loans? There are a few advantages that come with using short-term loans to fund various areas of your business, rather than choosing a longer-term loan, which we will look at below.
- Fast approval rates: Short-term loans are typically provided by alternative lenders. These lenders tend to ask for applications to be filled out online, and once you’ve done this, your application is likely to be approved quickly, so you can have access to money sometimes the same day.
- Requires less information: Unlike traditional lenders, alternative short-term loan lenders don’t require as much information from you to make their decision. Applying for a long-term loan can be a long, time-consuming process, so if you’re short on time, and don’t have time to be heading back and forward to the bank with documents, a short-term loan could be a better option.
- Easier to qualify: Short-term loans are typically easier to qualify for than you’d find with long-term, traditional loans. Even if you have a bad credit history, you may still be able to benefit. These lenders are more flexible with requirements and tend to base their approvals more on affordability rather than your credit score. Of course, it helps to have good credit as you can get a better deal on your loan.
What are the disadvantages?
When applying for finance, it’s always best to weigh up the disadvantages too, so you can get a better idea of whether a short-term loan really is most suitable for you. So, along with the list of benefits, here are a few factors you’ll need to think about to help you decide whether a short-term loan is best.
- High-interest rates: Although short-term loans are accessible for those that have a low credit score, it’s worth remembering that this often means higher interest rates as the lender compensates for the fact they are taking a risk. This may end up with the loan being more expensive when you add on the interest than other options.
- Hidden fees: Much like with any finance option, you should look for hidden fees that may also add to the monthly repayment costs. For example, you should be aware of any late repayment fees, as well as additional application fees that can push the cost of your loan up.
- Smaller loan amounts: Because the loan needs to be paid over a shorter amount of time, many lenders only offer smaller loan amounts. This is so the borrower can manage the repayments more easily and so the lender can rely on getting their money back. This does differ depending on the lender you choose, but may not be the best option if you’re hoping for a larger sum of money to cover growth or expensive equipment costs.