When you own a small business, you have to be on the lookout for possible setbacks that could potentially make said business grind to a halt. You want to maintain your cash flow through fluctuations in income and sales.
You want to keep your equipment up-to-date, get repairs fast to keep production going, and launch new products and publicity campaigns in order to grow in competitive markets. And if you’re just starting up, you might want to start operating before you find your big investor.
Sometimes keeping everything going requires a little outside help. While you could cover the costs of an emergency repair or a product launch out of pocket, doing so might interrupt your cash flow, causing new problems and new stress. Seeking outside financing can help smooth out these bumps in the road, so you can stay focused on your business.
While you may be familiar with long-term business loans , which are typically used for borrowing large sums of money and take many years to pay off, you may be less familiar with short-term financing options. Let’s take a closer look at some pros and cons of short-term business loans.
What Is a Short-Term Small Business Loan?
A short-term business loan is a loan that is designed to help small businesses maintain cash flow and cover small expenses. Because they are meant to be paid off on a shorter timeline (usually within 90 to 120 days) than long-term loans, they tend to have higher interest rates and can be secured very quickly . Basically, they can get you cash fast.
What Can You Use a Short-Term Business Loan for?
There are several common uses for short-term loans . A popular one is to cover project start-up costs. If your business is launching a new product or service, a short-term loan can help you avoid disrupting your business’s cash flow.
They can also help bridge cash flow gaps related to uneven sales or seasonal effects, cover emergency repairs, and purchase discounted inventory that you’re confident will sell fast and at a profit.
A short-term loan can also help small businesses take advantage of unexpected growth opportunities by giving them the capital they need to keep production running in a short time period.
What Are the Drawbacks of Short-Term Business Loans?
In addition to high-interest rates, short-term loans often require frequent repayments. Instead of the customary monthly payments that come with a lot of loans, short-term business loans often require weekly, and in some cases daily, repayments. While these payments tend to be small, they can be difficult to manage, particularly if your business has uneven sales or a lower cash-flow.
There’s also a risk of accumulating a lot of debt when using short-term business loans. Because they can be so easy to get (note: there are still eligibility requirements for these types of loans), using them could potentially lead to a business owner relying on this type of small business debt financing.
This could lead to a debt trap where someone would continue rolling over their short-term debt instead of paying it off on the predetermined repayment timeline. Ultimately, rolling over the debt means the business owner would accrue significant interest if they weren’t able to pay the short-term business loan within the initial term.
Read Next: Typical Small Business Loan Fees
What Alternative Financing Options Are Available?
There are a number of alternative financing options when you need cash for your company. A business credit card is another way to cover small expenses that you plan to pay back quickly. On the flip side, business credit cards can come with interest rates around 15% . And credit card debt is considered “revolving,” which involves borrowing against a credit limit, as opposed to paying off your debt on a defined term.
Short-term lines of credit can help you manage day-to-day cash flow, too. Lines of credit can help provide flexibility for business owners. You can borrow up to a set amount of money but are only required to pay interest on the actual amount of money that you borrow.
You can then borrow and repay the funds on a payment schedule similar to a credit card. Similar to credit cards, this is considered a “revolving debt.” Short-term lines of credit may come with maintenance fees. And the interest rate could go up if you fail to pay on time.
There are many financing options available to help pay for your business expenses. Short-term business loans can help you get the cash you need for your business quickly, and pay it off on the predetermined schedule, or add additional payments as your cash flow picks back up again.
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