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Pros and Cons of Short-Term Business Loans
March 14, 2018
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Pros and Cons of Short-Term Business Loans

One of the most important components of running a business is finding ways to effectively allocate capital. With a sound financial plan, your business can minimize operational costs and maximize potential growth. If your business is unable to get the capital it needs from a bank, you may want to consider applying for a short-term business loan through an alternative lender, or the Small Business Administration.

In this post, we’ll explain the pros and the cons of applying for a short-term business loan, so that you can determine if it’s the right option for you.

What Are the Pros and Cons of Applying for Short-Term Business Loans?

The Pros of Applying for Short-Term Business Loans

The most obvious benefit of a short-term business loan is that it can provide you with fast capital for your operations. In addition, a short-term business loan application is typically shorter than that of a traditional bank loan, as applications are often approved in less than 24 hours. This can be incredibly useful if your business has expenses that are due in the immediate future.

Additionally, some businesses prefer to apply for short-term business loans because they are very easy to apply for. These loans require relatively little paperwork and the applications can usually be completed online.

When compared to more traditional financing options, most short-term business loans have remarkably high approval ratings. Even if your business has a limited or poor credit history, you’re still very likely to qualify for a short-term loan. Although there are still a few drawbacks for applying for these loans, they’re certainly a legitimate financing option that your business may want to consider.

The Cons of Applying for Short-Term Business Loans

Since the application process is much more lenient than alternatives, most short-term business loans have comparatively high interest rates. When compared to loans that are more exclusive or have longer terms, you’ll usually end up paying significantly more in exchange for the same amount of capital.

The best way to minimize the total cost of securing financing is to repay your loan as quickly as possible. This can be especially crucial if your lender provides an early repayment discount.

Another drawback of applying for a short-term business loan is the fact that most of these loans require very frequent payments. Many of these loans require weekly, or even daily, payments. If your business doesn’t have consistent revenue source, you should consider other financing options.

It is important to note that regardless of your financing product, acquiring any sort of business debt is inherently risky. Generally, you should only apply for a loan if you believe you can repay your debt in full and on time. Otherwise, your business risks getting caught in a “cycle” of debt payments, which could jeopardize your business’s future.

Is a Short-Term Business Loan Right for Me?

Short-term loans can be a beneficial way to finance your business, but that doesn’t mean these loans don’t have drawbacks.

Before making any decisions, your business should consider all available options. If you can qualify for a lower-interest loan, and your need for capital isn’t time-sensitive, then a short-term loan may not be in your best interest. Additionally, if even after securing capital your business will continue to experience cash flow issues, you shouldn’t count on a short-term loan to completely resolve your current financial problems.

However, despite these risks, short-term loans can be helpful to your business. If your business has relatively quick cash flow cycles, a reliable method for repaying your debts, and a strong potential to benefit from an immediate capital infusion, then a short-term business loan might be right for you. Whether it makes sense to apply for this type of financing will depend on the specific conditions and characteristics of your business.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Andrew Paniello
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Andrew is an experienced writer with a degree in Finance from the University of Colorado. His primary interests are investing, entrepreneurship, and economics.
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