Short Term Business Loans
Most small businesses generally require short-term business loans rather than debt financing over a longer term. Most short-term loans typically come with a maturity period of 1 year or less and have to be repaid inside one year. In most cases, short term business loans are repaid to the lender much quicker than 1 year, and often within 3 to 4 months. Short term loans can help businesses take care of an immediate requirement for cash without needing to opt for a long-term financial commitment.
Uses of short term business loans
Businesses that carry out their trade during specific seasons, such as retail stores during the holiday season, find short term business loans to be especially helpful. The businesses may require cash inflow for a short period to purchase inventory much before the holidays and repay that loan only after the holiday season is over. This is one of the best uses of a short term business loan.
Short term loans may also be availed to increase working capital to overcome temporary deficits in cash for meeting expenses like payroll, etc. For example, some businesses may be waiting for their customers to pay for items purchased on credit. Businesses may also require short term funds to pay their own bills, such as payments to their suppliers. Sometimes, businesses may require short term loans for evening out their flow of cash, especially if the business conducted is cyclical in nature.
How to qualify for a short term business loan?
Business owners will need to put forward extensive documentation to a credit union, bank, or other financial institutions or lenders to be able to qualify for a short term business loan. All the documents given to a lender have to be presented in a professional format.
Lenders may ask for an assortment of documented proof, including accounts payable record (payment history to suppliers); documents showing repayments of other loans; and the cash flow history of the business for the previous three to five years, etc. In some cases, lenders may also ask business owners to provide their income statement for the past 3 to 5 years.
After checking the documentation, lenders will ascertain whether to offer the short term business loan as a signature loan or an unsecured loan, or as a secured loan backed by some kind of collateral.
Interest rate for short term business loans
The interest rate for short term business loans is generally dependent on the prime interest rate and some amount of premium. Varied lenders, including banks, select the premium by ascertaining the level of risk the business poses to them. Such risk is assessed by examining the documents offered by businesses as part of the qualification process for a short term business loan.
Short term loan interest rates are usually higher as compared to long-term loan interest rates in a normal economy. However, if the economy is in recession, then the rate of interest on short term loans may be lower as compared to long-term interest rates.