Start-ups and small businesses with minimal collateral and limited or no credit history often struggle to access small business loans. They resort to short-term loans as a viable option to meet their financial shortfalls.
Despite doing your best to anticipate all the possible expenses when starting a business, you can still get caught flat-footed with unexpected costs. Whether it’s a production machine breaking down or an unusual delay in payments from a dependable client, you’ll need funds urgently.
Short-term loans can be a lifesaver despite bearing the risk of having a short repayment period and being extra-costly.
What Is A Short Term Loan?
This is the kind of loan that a person or business obtains to meet temporary cash flow shortfalls. It’s characterized by repayments that can run from a few weeks to six months or a year. Start-ups that may not be eligible for small business loans from traditional lenders find it a feasible alternative.
These loans range from as low as $100 to $100,000, offering much lower amounts compared with conventional small business loans. However, they’re drawn down much faster sometimes within 24 hours of approval. This helps settle sudden cash-flow strains.
Benefits Of Getting A Short-Term Loan
A start-up can benefit from them in several ways.
1. Relaxed lending eligibility requirements
Many start-ups and small businesses have less-than-impressive credit scores making it restrictive to access longer-term loans. Short-term loans have lenient requirements that allow these businesses access to credit.
2. Speedy funding time
A shorter repayment period means less risk to the lender. These loans are approved and disbursed to applicants sometimes within a day.
3. Short repayment period to incur interest
Given that the funds are repayable within a year, you’re likely to pay less total interest. Long-term loans and other small business plans have a huge interest component given the longer repayment period.
4. Grow credit score
By repaying these loans on schedule, you’re able to build up your credit score. This track record sets up your business to apply for larger business loans for substantive capital expenses in the future.
The Best Type Of These Loans For Your Business
1. Online loans
Several fintech companies offer online loans that are approved automatically using digital algorithms. The approval and transfer of funds to your account happen almost instantaneously.
2. Merchant cash advances
This is a short-term loan by a lender who advances a start-up to a lumpsum amount. The loan is repaid by collecting a percentage of future credit card sales when clients make purchases at the borrower’s store.
3. Invoice financing
As a business owner, you can use your unpaid bills to secure short-term loans from lenders. The lender will charge your principal plus interest when your client pays. Then they will remit the balance to you. You will receive financing while you wait for customer payments.
4. Payday loans
Business owners who still earn a salary can access emergency loans on the expectation of repaying the loan on payday. The entire amount is paid off when the salary hits the account.
5. Lines of credit
The business can access an overdraft limit that’s payable by monthly installments. Monthly payments fluctuate depending on how much money the company uses from the line of credit. They’re cheaper when measured against business credit cards.
6. Customer advances
This applies where customers make bookings by paying for a service in advance allowing you access to cash flow for services you’re yet to render. Think of hotels, or show tickets that are purchased in advance.
7. Selling items on installments
You sell an item to a client who pays for it in installments. Your customer makes payments in installments and collects the item upon completion of payments. Though not strictly a loan, it’s a funding option that enables the business owner to access funds quickly.
Short-term loans can be the lifeline for start-ups that may be eligible for conventional loans. These loans are easy to access and have a quick turnaround that makes them particularly attractive. Seek out for the best short-term loans to keep your business afloat.