How To Understand The Pros And Cons Of Short-Term Business Loans

ClickHowTo Team
Written by ClickHowTo Team

Short term loans are something that every business may require time and again because emergency cash may be needed for business operations or some other purposes. There are plenty of options in the market, which makes it difficult for the merchant to choose the right one. One thing that all of them have in common is that they cover only a short span of time, usually 6-18 months, and need to be repaid along with the interest amount within this time span. Before considering these options, you must thoroughly understand what short-term loans are all about and also know their pros and cons.

Pros of short-term loans

Even though these loans come in variant shapes and sizes, there are some common benefits that they share:

Low cost of capital: The initial and perhaps the most important plus point of short-term loans are that they come at a low cost of capital as compared to their long-term counterparts. Even if you get the loan at a higher rate of interest, you end up paying lesser effectively because the interest is accrued for a shorter time period as compared to long-term options.

Quicker time to funding: Another reason that gives these loans a brownie point is that they require lesser time to funding in comparison to the longer term options. If you are in an emergency need, fast title loans online would be a great option as it gets processed within a short period, sometimes even in a day. The underwriting process is faster and less complicated because the risk for the lender is lesser.  Even the application process is less comprehensive and paperwork requirement is limited. So if you require handy cash for your business at any piint of time, this is the best alternative that you have.

More accessible: Getting qualified for a loan is perhaps the biggest challenge that a borrower faces because no lender would want to put his money on a risky venture. Being a less risky option, short-term loans have lesser stringent requirements for a borrower to qualify for it. Even if the long-term options are affordable and convenient, most businesses fail to qualify for them. The minimum requirements that businesses need to fulfill to comply with the short-term loan disbursal guidelines are that they should have been in business for at least 6 months and have am annual revenue of $ 50000. This makes these loans more accessible to even startup businesses that are less likely to get qualified for borrowing funds for longer time spans.

Cons of short-term loans

While short-term loans come with several pros, they have their share of cons too. After all that has been said about their benefits, let us know more about their drawbacks:

Smaller loan amounts: Short-term loans are not suitable for large requirements and capital expenses of a business because these are generally small in amounts. The reason is that the lenders are not willing to put their money on risk as the borrowers may not be able to pay back massive amounts within shorter time spans. They prefer to keep the loan on the smaller side so that their funds are not saddled up in risky ventures. If you require a considerably larger funding for your business, then a long-term loan would be a more suitable alternative for you.

Payments are frequent: Since these loans are to be paid back within a shorter time intervals, payments are usually scheduled to be done at regular and frequent intervals. This can be a challenge for a business that has to disburse them and also ensure that their day to day expenses are taken care of. Frequent payment requirements could be weekly and even daily, which can lead to the disruption of the normal cash flow of the business. You may even need to make some considerable adjustments with your budget during the loan term.

Payments are higher: Another downside of short-term loans is that the payments you need to make are higher in value. This is because the total loan along with the interest has to be repaid within lesser time and the amount to be paid in each installment is significantly high.

Consider these pros and cons well enough before you avail a short-term loan for your business. Also, study the various kinds of short-term loan options that you can use. Get to know some trustworthy providers in the market so that you can connect with one that offers you a good deal. There are plenty of online websites to get such loans and you can do some research to find them.

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ClickHowTo Team

ClickHowTo Team