Understanding short term business loans

Understanding short term business loans

Even the smallest of businesses have a place for equity and debt financing. With regard to debt financing, most small businesses get their loans from banks in the form of short-term business loans. The loans are defined by their short tenure and serve different purposes. They are used for short-term financing and have a maturity of less than one year. Most of the loans are repaid within three to four months only.

Purpose of the loan
The purpose of a short-term business loan is to help you meet the short-term needs of your business without making a long-term commitment. The loans are ideal for businesses that are seasonal in nature.

  • It helps the business owner build up an inventory for the season and the loan may be repaid by the end of the season.
  • It helps serve as a working capital in the business as it may cover up for a temporary cash deficiency.
  • You might have credit customers who are yet to pay their bills, but you cannot delay your payments any further. In times like this, it is best to apply for a short-term business loan.
  • You might have fallen short of funds for whatever reason and need a loan to pay your own bills on time.

Such a loan serves various purposes and makes it easier to run your business without any interruption.

Qualifying for the loan
In order to apply for a short-term business loan, you will have to provide detailed documents to the lender. The lender will ask for your payment history of the other loans you have had in the past to get an idea of your credit repayment history. Your accounts payable, income statement, as well as your cash flow in the business for the last couple of years are some other important documents that you will need to submit for availing of a loan. The terms and conditions of the loan and the amount of the loan depend on the fact that the loan is secured or unsecured. If there is a security against the loan, the loan amount may be higher and the terms of repayment could be adjusted as per your needs. Most start-ups end up going for a secured loan for their new venture.

Whatever the size and type of your business, short-term business loans will help your business grow. However, you need to consider all the loan options before making a decision to apply for one. Also, compare the interest rates offered to you by different lenders and make a well-informed decision.

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