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Is A Short-Term Loan The Best Fit For Your Business?

When unexpected life events happen, sometimes you’re prepared and sometimes you’re not. As a small business owner, not only are you handling the curveballs that life throws your way, but also the unexpected challenges of business ownership. What happens when you’re not financially prepared for these situations?

If you’re a small business owner, cash flow is always top of mind. In fact, a recent study by JPMorgan Chase highlights how understanding cash flow patterns, and having a cash reserve, is critical to the survival of every small business. Not only can a cash reserve cover those surprise expenses and emergencies, it can also help you take advantage of unexpected growth opportunities.

If you haven’t yet built the reserve you need to handle what comes your way, there are other options. A short-term business loan can keep your company operating through cash flow crunches and unplanned life events, or help you finance a new growth opportunity. Short-term loans typically offer smaller funding amounts with higher interest rates—around 10% and higher—and they have shorter repayment periods. It’s not uncommon for lenders to request that borrowers pay back the loan on a weekly or daily basis.

Should my business consider a short-term loan?

Short-term loans are ideal for dealing with the unexpected. However, they are not just for emergencies like broken equipment — they can also be used for a surprise project, or even an increase in demand. Short-term loans can cover project costs that will be recouped in a few months, bridging a seasonal sales slowdown, or even purchasing inventory at a great price. There are no restrictions on how you can use the funds.

The cost of capital on a short-term business loan tends to be higher than long-term business financing such as bank loans, but you’ll receive the cash quicker. Additionally, these loans are a good option for those who have only been in business for a short period of time (at least two years), have some credit issues, or don’t qualify for traditional term loans.

Remember that using short-term loans can help you accomplish your business goals, improve your credit history and score, and help you qualify for different types of financing down the road. The key is to be smart about calculating the return on investment for your business before you take on this type of financing.

A request for a short-term business loan is likely to be accepted if you have a solid business case for one. Your lender may also ask you to put down some collateral to secure the loan. Before you apply, ask yourself these questions to determine if a short-term loan is right for you:

  • What do I need the capital for?
  • How much money do I need?
  • What does my credit profile look like?
  • How quickly do I need the funds?
  • Is my business healthy enough to cover the loan payments?

 

How to apply for a short-term business loan

So you want to apply for a short-term business loan. Now what?

Start by using a short-term loan calculator to determine how much you can afford before you consider your options. Once you know how much you’ll need, you’ll be better equipped to compare rates, terms, and payments for a variety of short-term options.

Generally, short-term loan options range from $2,500 to $500,000 over one to three years with interest rates as low as 8%, and you can often receive funds in as little as 24 hours. Be sure you budget enough time to weigh your loan options without feeling rushed, make comparisons, ask questions, and determine the best loan to suit your business’s unique needs.

Whether its bridging a gap in cash flow or inventory management, or purchasing equipment that rapidly boosts revenue, a short-term loan can help ensure you have the capital on hand to deal with whatever comes your way.

Author Bio:
Sara Amato is a graphic designer, writer, and contributor to the Lendio blog. Currently based out in Colorado, she was born in New Jersey and has lived in Indiana, California, Arizona, and Illinois. When she’s not designing or writing, she’s probably watching TV or eating pizza.