The Pros and Cons of Short-Term Business Loans
If you can’t get approved for bank financing, you may want to consider applying for a short-term business loan. Alternative lenders and the Small Business Administration (SBA) both offer short-term business financing options.
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, you should review the pros and the cons of applying for a short-term small business loan. By doing this, you can determine if it’s the right business opportunity for your business.
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. In addition, a short-term business loan application is typically shorter than that of a traditional bank loan. This can be incredibly useful if your business 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 higher interest rates. When compared to loans that have longer terms, you may end up paying significantly more for the same loan amount.
The best way to minimize the total cost of securing working capital l is to repay it as quickly as possible. This can be especially crucial if your financial institution provides an early repayment discount.
Pro: The Loan Application Process is Simple
As we previously mentioned, the application process for short-term financing 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. If you have any questions, be sure to contact the lender you’re applying with.
Con: Frequent Payments Are Required
A notable drawback of applying for a short-term business loan is that most of these loans require very frequent payments. In fact, many of these loans require weekly, or even daily, payments. If your business doesn’t have a consistent annual revenue source, you should consider loan options. That way, you can pursue financing options that offer more flexible repayment terms.
However, if you’re unable to make these daily or weekly payments, you may qualify for trade credit. With this option, you can buy items on credit and pay the supplier at a later date. It’s still considered short-term financing, but functions differently than a traditional short-term loan from a lender.
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 small business has limited or poor credit history, you still could qualify for a short-term loan.
The business lender will still want to review both your personal credit and business credit scores. However, their financing requirements probably won’t be as stringent if you have a good credit score.
If you have poor credit, you may need to apply for a secured loan instead. To ensure you repay the loan, the lender will ask you to submit collateral. If you’re unable to pay off your loan, they’ll collect the collateral in exchange.
Although this will help you receive financing, it’s important to consider what will happen if you lose the collateral. For instance, losing business equipment could make it difficult for you to run your operations.
Con: There’s the Potential for Significant Debt
It’s 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. This could be hard on your bank account and ultimately jeopardize your business’s future.
Is a Short-Term Business Loan Right for Me?
Short-term loans can be a beneficial way to reduce cash flow gaps, but they also come with drawbacks.
Before submitting a loan application, your business should consider all available options. For example, if you can qualify for a low interest loan, a short-term loan may not be your best option.
However, despite these risks, short-term loans can be helpful to your business. Your business may benefit from a short-term business loan if:
- Your business has relatively quick cash flow cycles
- You have a reliable method for repaying your debts
- You’ll benefit from an immediate capital infusion
Whether it makes sense to apply for this loan type will depend on the specific conditions and characteristics of your business.
Editor’s Note: This post was updated for accuracy and comprehensiveness in June 2021.
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.