Business owners must constantly juggle many balls all at once in order to keep their businesses alive, thriving, and profitable. One of the balls you might find hard to keep in the air is the financial needs of the business. Sometimes, the business doesn’t just run smoothly enough to fund itself and you'll need to raise funds from an external source. A short-term loan is often an effective solution for business owners when they face a cash crunch in business.
A short-term loan is a small loan that you repay within short term , usually less than 18 months. The main reason short-term loans are effective for meeting business needs is the speed with which the loans are approved. A short-term loan can be processed and approved within hours and most applications don't take more than a couple of days to be completed. More so, it is easier to qualify for a short-term loan than qualifying for an SBA loan or other business loans.
The speed comes at a price
However, the speed with which you can raise money by taking short-term loans comes at a price. You should understand that short-term loans typically attract a higher interest rate than SBA loans or other medium to long-term bank loans. You should also now that paying off the loan earlier than scheduled on the loan term won't get you off the hook on paying the high interest. Some lenders will require you to pay the interest in full and others will ask that you pay-of a percentage (usually mid-range) of the total interest payable.
You should note that it is highly unlikely that the interest will be forgiven. Hence, you should be ready to cough out the high interest or pay an equally high early payment penalty. Nonetheless, business decisions are not always black and white and it might still make sense to get a short-term loan in some instances.
Below are three instances when it makes sense to get a short-term loan.
When you need cash to generate Income
It usually makes sense to opt for a short-term loan when you need cash quickly in order to pursue an opportunity. For instance, you might win a huge contract to supply your products or offer your services with a clause that you'll be paid after you have fulfilled the order. Instead of letting the opportunity slip through your hands, you can get a short-term loan to raise cash to fulfill the order. Once you fulfill the order, you can pay back the loan (plus interest) and keep your profit – it is a smart business maneuver known as using 'other people's money' to do business.
To meet emergency needs
It also makes sense to get a business loan when you have an emergency cash need but you happen to the short on cash. For instance, your equipment might suddenly breakdown and the insurance firm might not be moving as fast as you want to fix it or provide you with a replacement. You might also need to take a short-term loan when you business runs into financial quagmires due to events beyond your control instead of sitting idly until things degenerate beyond remedy.
When your balance sheet is not balanced
Thirdly, you should seriously consider taking a short-term loan when you happen to be in a weak cash position. Irrespective of the level of your financial dexterity, you'll experience a season when your business expenses are more than your business income. For example, the demand for your product might drop, a large part of your capital might be tied down as inventory, and you might have a large number of accounts receivable. In such instances, no amount of calculations will get balance your accounts and you must seek out money through other means in order to keep your accounts balanced.