It’s not uncommon for small businesses to need cash fast. As a result, so many business leaders resort to getting short term loans. Discover if it’s right for your business.
Be it getting inventory or hiring employees, fast short term business loans can be a great solution for businesses in need of funds.
They allow you to keep your working capital to pay for operating expenses. And you get the funds to cover new receivables based on your business goals and strategy.
Also, some companies use an unsecured short term loan for small business to cover shortages in working capital. And that can be particularly helpful for growing businesses.
Still, you need to approach short term loans with caution.
To help you choose the best option, the following sections explore the odds and ends of these loans.
Short Term Business Loans Explained
As indicated, these loans help businesses get enough working capital, usually for a term of around twelve months or less.
When secured or unsecured short term business loans get approved, your company receives a lump sum. Then, you’re accountable to repay the sum, plus interest as agreed with the lender.
The term is very short, which could put a strain on your cash flow. However, you should view this type of loan differently.
For example, short term loans for startup business can be an excellent tool to cover immediate business needs and boost your revenue.
Also, the short term usually means the amount you take out is smaller.
Therefore, you don’t need to stress if you’re borrowing or paying too much. Instead, you can be sure you’re only getting the funds required to meet a specific business goal. Plus, the short term means the time for interest rates to accumulate is limited.
Speaking of which, the term is usually between six and twelve months. If it’s longer, your loan doesn’t belong to this category.
Typically, short term business loan lenders offer to small businesses include:
- Merchant cash advance (which is more like financing than a loan)
- The business line of credit
- Small Business loan
What Makes Your Business Eligible for Short Term Loan
Lenders offer different loan amounts, interest rates, and repayment conditions. That’s why each short term loan is different from another, so the eligibility criteria may also vary.
The way lenders evaluate your applications largely depends on their requirements. Plus, lenders may have programs designed to address the needs of specific businesses. So, you’d need to shop around and assess the loan structure with each lender you find.
However, there are some universal criteria most lenders evaluate.
- Age of your company – your business needs to have been in the industry long enough so that lenders know you have the capacity to repay the loan. Usually, your business needs to be in operation for six months or more to get approved.
- Personal and business credit history – this is how lenders determine if you’re going to be late with payments or not. But with short term business loans, bad credit history might not be too much of a hindrance.
- Revenue per annum – your revenue paints a clear picture of your business performance. Therefore, lenders may focus on it more. Usually, having $120,000 or more in revenue makes you eligible for a short term loan.
With that in mind, offering collateral may allow you to negotiate a better deal. But there are also unsecured options where you don’t need to lock your assets into a loan.
That being said, the majority of lenders ask for a personal guarantee. With the guarantee, it means you’re accountable to cover the cost if something happens to the business. And the lender will then be able to tap into your personal assets.
To Apply or Not to Apply
There’s no cookie-cutter framework to determine if a short term loan is a good option or not. However, there are some general guidelines to gauge if you need a long or short term financial product.
Start by examining your business needs. That includes your current cash flow, revenue, expenses, etc. And you need to be sure about the strategy on how to utilise the loan.
For instance, you might need a lot of cash to cover business growth. Due to that, the finances you take won’t result in short term revenue growth. So, it’s logical that a long term loan will work better for you.
However, if you need to pay the expenses that result in a fast revenue boost, then a short term business loan is the way to go.
Generally, it’s okay to use them to cover seasonal cash flow slumps. The same goes for seasonal opportunities, which could be accepting a new client or project.
But when an opportunity presents itself, you need to carefully analyse it to ensure you’re profitable despite taking out a loan. This principle also applies if you use a short term loan to cover advertising and marketing expenses.
Needless to say, you need to be certain that your marketing campaign will lead to a significant short term boost in your revenue. Otherwise, the loan could become a substantial financial burden.
Now, these are the things about the loan that you’ll only find out as soon as you contact a lender. It’s because, as mentioned, not all of them offer the same terms and conditions and your interest rates depend on various factors.
Assuming your company has been around for some time and it’s doing well, you shouldn’t expect the interest rate and payment frequency to be a barrier.
Secure Short Term Growth
When all is said and done, short term business loans are a great financial vehicle to give your business a quick boost.
But remember, this isn’t something you’d apply for to support your long term strategy. And when using short term loans to cover operating expenses, be careful not to jeopardise your cash flow.
Remember, both secured and unsecured short term business loans are available. And if you want to explore the second option, Unsecured Finance Australia is here to assist.
We offer unsecured business loans starting from $5,000 up to $300,000.
We ask for minimal documentation and offer 24-hour approval.
You can find out more about our unsecured business loans here.