One of the most important components of running a business is finding ways to effectively allocate the capital. With a sound Financial plan your business can minimize operational cost and maximise potential growth. If your business is unable to get the capital from a bank, you may want to consider applying for a short-term business loan, through an alternative lender or Small Business Administration.
The Pros for Applying Short-Term Business Loan
The most obvious benefit of a short-term business loan is that it can provide you with fast capital for your operations. In addition, a short-term business loan application is typically shorter than that of a traditional bank loan, as applications are often approved in less than 24 hours. This can be incredibly useful if your business has expenses that are due in the immediate future.
It can help you prepare for emergency expenses: Even the most prosperous businesses with massive amounts of fixed assets can find themselves in trouble if they are unable to keep up with their monthly bills. Through short-term financing, you can reduce the pressure on your company and avoid making late payments to creditors, saving your businessâ€™ credit rating.
You can maintain ownership of your company: While equity investors provide funding in exchange for a large portion of your companyâ€™s ownership, borrowing from a bank or independent lender will allow you to gain the capital you need without sacrificing your decision making power. Although you must still make your payments to your lender on time, your obligation to them ends there.
You do not need collateral:Many working capital loans are unsecured, meaning that you will not need to front any collateral in order to be approved. Generally speaking, small businesses with a very good credit history are far more likely to be approved by a bank for an unsecured short-term financing loan, though independent lenders may still sometimes approve businesses with less-than-stellar credit.
Shorter terms: As their name suggests, short-term business loans are designed to assist your business with immediate problems. You will not have to plan for years of payments to pay back what you borrow.
Quick approval:When your business needs money quick, you cannot afford to endure a lengthy application and approval process only to find out that your request has been denied. Working capital loans avoid the hassle of traditional bank loans and can help you get the money you need almost immediately, oftentimes within a week of applying.
The Cons for Applying Short-Term Business Loan
High Interest Rates: Since the application process is much more lenient than alternatives, most short-term business loans have comparatively high interest rates. When compared to loans that are more exclusive or have longer terms, youâ€™ll usually end up paying significantly more in exchange for the same amount of capital.
The best way to minimize the total cost of securing financing is to repay your loan as quickly as possible. This can be especially crucial if your lender provides an early repayment discount.
Frequent Payments: Another drawback for applying for a short-term business loan is the fact that most of these loans require very frequent payments. Many of these loans require weekly, or even daily, payments. If your business doesnâ€™t have consistent revenue source, you should consider other financing options.
However, despite these cons, short-term loans can be helpful to your business. If your business has relatively quick cash flow cycles, a reliable method for repaying your debts, and a strong potential to benefit from an immediate capital infusion, then a short-term business loan might be right for you. Whether it makes sense to apply for this type of financing will depend on the specific conditions and characteristics of your business.