short term business loan

The Pros and Cons of Short-Term Business Financing

Ezra Cabrera | January 3, 2019

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    Finding the right business loan for your business is neither quick nor easy. However, there are many resources available that can help you find funding that is right for you. With so many different types of business loans available, it’s critical you choose one that is best suited to the needs of your business, from both a short and long term perspective.
    Applying for a short term business or bridge loan will come with a variety of pros and cons. Understanding each of them is essential to the success of your business on a moving forward basis.

    What is a Short-Term Business Loan?

    A short-term business loan is a financing options specifically created for business owners needing immediate capital to address short-term expenses. Similar to a standard business term loan, lenders will give the funds to you in a lump sum payment and you can pay it back in fixed monthly payment within a few months to two years.

    Aside from the original loan amount, you also need to repay any interest or fees lending companies charge. Be sure to work with a reputable lender that doesn’t charge any hidden fees.

    In some cases, you may qualify for a short-term revolving line of credit in the form of a business credit card or credit line. Depending on the type of account, you may need to repay the full loan amount within the year. Once it’s paid, your loan limit will increase and you’ll be able to repeatedly use the credit line.

    Prevent Cash Flow Issues with Short-Term Loans

    Cash flow issues are common among small business owners. Around 82% of small businesses in the U.S. fail because of cash flow issues. If your business is dealing with cash flow, short-term business loans can keep your company from going under.

    It’s best to apply for short-term loans before cash flow becomes a serious issue. However, it’s important to assess your business to see if a short-term loan can help solve pressing financial issues.

    Pros and Cons of Short-Term Business Loans

    Below are some of the pros and cons you need to be aware of before applying for a short-term business loan.

    Pros of Short-Term Business Loan

    • Speed – The application process for a short-term loan is quick and easy. Your loan application can be processed in just a few hours. Once approved, your short-term loan can be closed and funded a few hours later.
    • Documentation – Unlike a traditional bank process there are only a few items that are needed to approve a short-term loan. A simple loan application and 6 months of bank statements are all that’s needed in order to receive an approval.
    • Quick Funding – When your short-term loan is approved, you will only need to provide a few documents for funding. Typically, all you need is a copy of your driver’s license, a voided check, and proof of ownership. Once provided and you sign your loan document, your funds are available shortly thereafter.

    Cons of Short-Term Business Loans

    • Terms – Short-term loans have repayment terms that range from 3 to 18 months. With the short duration of a loan, it will have to be repaid quickly. This is why it’s critical you are certain your cash flow can support the loan payments and the funds are being used for the intended purposes.
    • Rates – The quick application process comes with its cons. With limited documentation comes the need for lenders to charge higher than normal rates. It’s important to understand your profit margins before accepting a short-term loan. Your return on investment is important.
    • Payment Frequency – Bank and SBA Loans have monthly payments, while short-term loans have daily or weekly payments. Although this is not a big drawback, it is something that many business owners are not used to. Best to ensure you have consistently strong bank balances on a daily basis that can support your daily or weekly payments.

    Do the Pros Outweigh the Cons?

    Now is your chance to look at the pros and the cons of a short-term business loan and determine if it’s the right fit for you. The route to quick and easy is not always the best. The situation and use of funds are what should determine whether or not a short-term business loan is a right choice for you.

    Entering into a loan agreement is a big step for you and your business. That’s why it’s important you select a choice that is right for you. If you are unsure or have more questions, speak with a lending expert who will be more than happy to answer your questions, and guide you step-by-step.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.