Every business, no matter how large or small, has to go through the steps to manage their finances. Part of this is properly handling debt, which for most businesses comes in the form of a business loan from a bank. However, just because loans provide money doesn’t mean they are all the same. Each and every lender has different stipulations, with some having short or long maturities. If you’re in business and are about to embark on a short term business loan, then preparation is key. Some of the most important information to know ahead of time is listed below.
What is a Short-Term Business Loan?
Every small business that needs money is likely to get a short-term loan from a lender. This simply means that it will mature in one year or less. This is different from a long-term loan, which can normally last for many years. The type of short-term loan you are able to secure will vary, so make sure you speak with your lender about repayment terms. In some situations, it must be repaid with 90-120 days, which can be difficult if you aren’t aware of the time crunch. Generally these types of loans are adequate for businesses that need immediate cash that they can easily re-pay without the long-term commitment.
Why Are Short-Term Loans Useful?
Businesses that need funds in order to get by until the next busy season are those that most commonly seek short-term loans. For example, the busy season for retail stores is the holiday season, with the slow season being in the summer. They may seek out a short-term loan before the holidays hit in order to purchase inventory to meet demand during that busy time. Because they know they will be able to re-pay the loan, they don’t mind the short-term commitment.
While seasonal businesses do use these types of loans often, they aren’t the only ones. Some businesses use these to cover their own expenses, raise working capital, or meet payroll expenses that are temporarily deficient. There are also companies that seek sme loans to have positive cash flow when they need it the most.
How Can You Qualify?
If a short-term loan seems like it’s the right choice for you, then you may be wondering what you need to do to qualify and receive the funds that you need. To begin, gather all financial documents for your business to prove that you’re worthy of a loan. This may include payment history for other loans, accounts payable proof, cash flow history for the company, and an income statement.
In most situations you’ll want to go back 3-5 years to show stability to the lender. Once you have that, it will be up to the bank to determine if you will have to offer collateral in order to secure the loan.
Are the Rates Better for a Long-Term Loan?
Running a business means always looking for ways to save money, especially on interest. This is why you may be intrigued by long-term loans, which have lower interest rates than short-term loans. However, this does depend on the economy at the moment as well as your ability to quality. Not to mention you may end up paying more for a long-term loan that lasted for years rather than a short-term loan that lasted for months.
In order to determine the rate you’ll have to pay on a short-term loan, it will be based on premium as well as the prime interest rate. The premium is calculated by the lender going through your financials to determine how much of a risk your company is (i.e., will you pay them back). To save yourself and your company money, work with your bank lender to calculate the smartest interest rate plan for you.
What If You’re a Start-Up?
Almost any qualified business can receive a short-term loan if they are aware of the steps necessary to do so. Even start-up companies can secure these, although they must prove their business plan and explain how they will be able to pay the money back as quickly as possible. However, it’s not uncommon for start-ups to be offered secured loans to start with, as the collateral that must be given with these provides the lender with security.
Short-term loans are vital to the economy today, as they help all sizes of businesses run smoothly and overcome temporary challenges. For any business owner, this is well worth considering as long as the proper research is done ahead of time.