Pros and Cons of Short-Term Business Loans
Every small business owner is different, so business financing will never be “one size fits all.” A type of financing that might be beneficial to another business might not be the right option for your company. Due to this, we’ll explain the pros and the cons of applying for a short-term small business loan, so that you can determine if this type of business opportunity makes sense for your company.
What Are the Pros and Cons of Applying for Short-Term Business Loans?
Pro: You Should Receive Your Loan Quickly
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 and requires less information. This can be incredibly useful if your business has expenses that are due in the immediate future, and you can’t afford to wait on a long approval process.
Con: These Loans Come with High Interest Rates
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 loan amount.
The best way to minimize the total cost of securing additional working capital is to repay your loan as quickly as possible. This can be especially crucial if your financial institution provides an early repayment discount.
Pro: The Application Process is Simple
As we previously mentioned, the application process for a short-term business loan is fast. In addition, it will likely be easy to complete. These loans require relatively little paperwork and the applications can usually be completed online.
Con: You’ll Have to Make Frequent Payments
A notable 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 loan options that might offer monthly payments or another type of flexible schedule.
Pro: Easy to Qualify for
When compared to more traditional business 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. The lender will still most likely want to review both your personal credit and business credit scores, but their requirements probably won’t be as stringent.
Con: There’s the Potential for Significant Debt
It is important to note that regardless of your financing product (whether it be a loan, line of credit, or credit cards, to name a few examples), 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 be hard on your bank account and in turn 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 the most suitable option. In addition, if even after securing capital your business will continue to experience cash flow gaps, 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 loan type will depend on the specific conditions and characteristics of your business.
Has your small business received a short-term business loan? Tell us about your experience in the comment section below!
Editor’s Note: This post was updated for accuracy and comprehensiveness in January 2019.
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.