A short term loan is a type of funding alternative that you can apply for to support a temporary business capital requirement. In this type of short term business finance, you need to pay interest on the amount you borrow. It is a valuable option, especially for entrepreneurs, start-ups, and small businesses that are not eligible for a business loan from a bank. Besides, this type of loan is beneficial for businesses and individuals who experience sudden and temporary cash flow issues.
Characteristics of short term loans
Short term or 1st mortgage loans are called so because of how quickly the borrower needs to pay off the loan. In most cases, you will get time to repay the loan amount within six months to a year. Besides, some lenders might allow you to pay back their money within 18 months.
Apart from this, some short term funding options do not specify a payment schedule as the funds are repaid in full by the due date. The 2nd mortgage lenders enable the borrower to repay the loan with applicable interest in one lump sum.
Types of short term loans
As you might know, short term business finance comes in different forms. To know all these, go through the below types.
Lines of Credit
This is another form of short term business loan. It is similar to using a business credit card. A credit limit is set, and you can tap into the line of credit as required. You need to pay EMIs against whatever amount you have borrowed. The most prominent benefit of lines of credit over business credit cards is that it has a lower APR or Annual Percentage Rate.
Invoice financing is a way for organizations to borrow money against the amounts due from consumers. It assists small businesses in improving their cash flow, paying staff and suppliers, and reinvesting in business growth. In this, the business should pay a certain percentage of the invoice amount to the 2nd mortgage lenders as a charge for borrowing the capital.
In this type of short term business loan, you do not need to offer anything to the lender to secure money from the lenders as the amount you borrow is determined by your turnover. But the lenders have higher interest rates as they have risks. Besides, you also need to have a decent credit history to take out an unsecured loan.
It is contrary to the unsecured loan, as, in this type of business finance, you need to submit your asset or collateral to the lender to secure money. As a result of these assets, the lender offers money at a more affordable interest rate and flexible loan terms and conditions. You can negotiate the loan amount with the lender as well.
The application process for short term loans
Getting short term business finance for your business is a straightforward process. You can apply for it through a financial institution. In most cases, your eligibility will depend on the lender you select. But if you do some background checks on different lenders, you might get the loan with ease. You need to have been in the business for at least six months, have a good credit history, and have an adequate cash flow to qualify for the loan. Besides this, you will also need some documents like your business financial statements, bank statements, balance sheets, credit reports, and others while applying. But before applying, you should verify the lender’s requirement beforehand to avoid loan application rejection.
Advantages of short term loans
By reading the above segments, you can understand the usefulness of short term business loans. But if you want to know more about the advantages of this type of business finance, you need to look at the following benefits.
Easy To Obtain
A short term loan is a lifesaver for start-ups and small businesses or other individuals suffering from poor credit scores and temporary cash shortage issues. As the loan requirements are generally easier to meet, borrowers can secure the funds for themselves. Besides, the lender of short term loans usually offers a small amount. As a result, the repayment schedule also helps the borrowers. They can solve their financial instability or cash flow issues with ease.
Quick Disbursal Time
The biggest advantage of this kind of loan is that it takes less time to approve the funding. You will get some lenders approving your loan application within 24 hours. As a result, you can obtain the required funds more quickly.
Short term loans are less risky for borrowers because of their shorter maturity dates. The borrower’s ability to pay back the loan amount with interest is less likely to change over a short time frame.
Lower Interest Rate
As you need to pay off a short term loan within a year, you have to pay less interest rate than many other funding types. Hence, it is one of the significant benefits of this kind of loan.
To sum up, the above discussion is a detailed overview of short term business loans. While applying for this, you need to have a good credit history and cash flow. Besides, prepare a solid business plan so that the lender of 1st mortgages can consider you as a creditworthy person. So, if you ever need money, quickly gather all the necessary documents, apply for the loan, and reap the above benefits.