Cash flow is a critical part of any business. Even the most disciplined saver can come up short from time to time, though. If you’re running low on cash, a short-term loan might be just what you need. You can use the loan proceeds to get caught up on expenses, invest in equipment or consolidate expensive debt. Keep in mind that short-term loans have their drawbacks as well, and you should review all your short-term and long-term financing options before moving forward.
TL;DR (Too Long; Didn't Read)
A short-term loan example might be a $10,000 loan with a 12-month repayment period.
What Is a Short-Term Loan Example?
A short-term loan is a loan with a relatively short repayment period. For example, a short-term loan might be a $4,000 loan with a five-month repayment term. With a loan, you receive a lump sum of cash, and then you repay that loan with interest. Since the repayment period is short, the required weekly or monthly payments could be steep.
The term of a loan is how long you have to pay it back. With many loans, you can make extra payments to pay it off sooner. Some loans have early repayment penalties, though, so keep that in mind as you apply for a loan. There’s no standard short-term loan definition, but in general, short-term loans have a term of 12 months or less.
Pros and Cons of a Short-Term Loan
One advantage of a short-term loan is speedy funding. Depending on the lender, you might be able to get financing within one or two business days. With a short-term loan, lenders may also work with business owners who have less-than-ideal credit. Short-term loans also typically have less paperwork.
The downside of a short-term loan is that loan amounts are smaller than other funding options. The maximum you’ll find is about $250,000, but lenders may offer much less depending on your credit and the repayment terms. Another downside is that interest rates may be higher than longer-term loans, but it depends on market conditions. As with any financial product, it’s best to get multiple quotes before moving forward with a lender.
Short-term loans may also have weekly repayments rather than monthly repayments. For some businesses, this could be a challenge, so keep the repayment terms in mind as you review quotes.
Alternatives to Short-Term Loans
A business term loan with a short repayment period might not be the best option. It depends on why you need funding, how much funding you need and your financial situation. The obvious alternative is a long-term loan. The Small Business Administration backs business loans, for example. SBA loans are available in higher amounts, but there’s also extensive paperwork.
Long-term loans are also available without SBA backing. Depending on the lender, those may have more flexible requirements. Another option is a business line of credit. With a line of credit, a lender approves you for a credit amount, but you borrow from your credit line as you need it, like a credit card.
Another option is a merchant cash advance. With a merchant cash advance, a financing company advances you cash, and you repay the advance every day with a percentage of your daily business income. Merchant cash advances are available to those with poor credit, but the daily repayments can make a serious dent in your income. Carefully review your contract before moving forward with a merchant cash advance.