Short-Term Business Loans

If you're a business owner, you've undoubtedly experienced stretches when your operation was somewhat slower – and less profitable – than at other times. To be sure, you're not alone; virtually all companies go through down periods from time to time. In the retail trade, for example, seasonal fluctuations are all too common. Seasonal products have to be ordered (and usually paid for) months before they'll actually be displayed in a store and sold. Situations like this – when your accounts payable schedule is shorter than your actual sales cycle – can play havoc on your company's cash flow. A short-term business loan is one method that can be used to "bridge the gap" by acquiring working capital to cover your accounts payable.

Short-term business loans may have durations of as little as ninety days or as long as three years, depending on both the lender and your purpose for the funds. For short-term financing, banks and other lending institutions tend to be very exacting with regard to how you'll use the proceeds and the repayment schedule that will be put into effect. For instance, if you need the loan to balance your business's cash flow until your customers pay their invoices, the lender will require you to pay off the loan as soon as you receive payment from your customers. Likewise, if you need the financing to pay for inventory, you'd have to repay the loan as soon as your inventory is sold.

Short-term funding is commonly used by both new and existing businesses. Indeed, some lenders will grant to new businesses only short-term loans, because loans of shorter duration tend to be less risky than those with longer payback terms. But regardless of whether the business is solidly established or just breaking in, the lender will want to review the company's documents and records, including credit files, cash flow history, balance sheets, and other related figures. If these documents aren't available because the business is too young, the lender will want to see the business owner's personal information instead – in the form of a credit report and tax returns for at least two years. This data weighs very heavily in the lender's decision-making process, because most short-term loans are unsecured; in other words, the lender will not require any collateral to be pledged against the loan.

However, some short-term loans are secured, meaning that some type of security will have to be pledged. Collateral can be in the form of real property, equipment, inventory, accounts receivable, or any other items that the lender finds acceptable. Although short-term loans generally have higher-than-market interest rates overall, collateralized short-term financing may have more favorable rates and terms because the lender has additional security with which to recoup its money if the business defaults. Furthermore, although interest rates are higher, they're usually of the fixed variety, so there's no risk of your loan rate (and subsequently, your payments) going higher in a rising market. And, since the loan's duration is short, you'll also pay less interest when tallied over the life of the loan than you would with longer-term financing.

blog comments powered by Disqus