Many businesses are increasingly turning towards short-term loans for financing.
While the short-term loans are favorable for most businesses, they also come with their fair share of drawbacks.
If you’re thinking of getting a short term loan for your business, you need to weigh the benefits as well as the risks.
And in this article, we shall explore the pros and cons of the short term business loan.
Quick Application Process
The application process of a short term loan is fast.
Unlike traditional loans, a short term loan will not require you to submit loads of paperwork, or even avail yourself physically.
In most cases, short term loans can even be arranged online.
In a nutshell, short term loans are not only easy to apply, but they will require the least amount of time.
Receive Funding Quickly
This benefit trickles from the quick application process we’ve mentioned above.
A short term loan will offer quick funding or your business operations.
At Finimpact.com, for instance, you can expect your loan to get processed within a time span of fewer than 24 hours.
The benefit of the swift processing of your loan is that you get funds-near instantly, and it’s suitable for those who cannot afford to wait for the long approval processes.
Contrary to traditional loans, short term loans have remarkably high approval ratings.
Even if your business has a poor credit record, you are still likely to qualify for a short term loan.
While the lender will still perform a thorough review of your credit score and financial health, the requirements are not as stringent as you would expect in a traditional loan application setting.
Given that short terms loans are typically processed with a short time, they make an ideal option for handling emergencies.
For instance, if a vital component that is critical for the running of your factory breaks, you’ll not have the time to wait until a loan is approved.
Here, you’ll need a quick fix, and the short term loans will offer the fast solution you’re looking for.
Payment within a Shorter Duration
According to The Balance, most of the short term loans are typically paid within a span of 3 to 18 months.
The lender is usually paid in a pre-determined schedule.
Unlike a long term loan, a short term loan will allow you to clear your loan within a limited duration.
Boost your Credit Score
This benefit arises from the fast settlement of your loan.
Unlike a long-term loan, where you’ve to wait for years before repaying your debt, a short term loan requires a limited period.
And once you successfully cleared your debt, your credit score might get boosted, allowing you to apply for a larger loan.
Drawbacks of a Short Term Loan
Short term loans are not without a fair share of drawbacks.
And in the section below, we look at the cons of short term loans
The application process on short term loans is lenient, and in most cases, it does not necessitate collateral.
To cushion the lender against such “risks,” they usually accompany the short term loans with higher interest rates.
If you compare the short term loans against the long term loans, you’ll realize that you’ll pay a higher amount of interest for the same amount of debt.
However, you can minimize the total cost of securing a short term loan by repaying the loan as quickly as possible.
This is particularly true if your lender offers an early repayment discount.
A notable con on short term loans is that they require frequent payments.
Given that most of them require to be settled within a short period, it follows that you’re required to make frequent payments, some requiring weekly or even daily repayment schedule.
Now, this can be a huge drawback, especially if your business does not have a consistent revenue source.
In such cases, we recommend that you choose alternative funding options that support favorable and flexible repayment schedules.
Potential for Significant Debt
This con is not only credited to short term loans but all types of loans.
Regardless of what financing option you choose, remember that acquiring any form of debt is inherently risky.
Whether short term or long, you should only apply for a loan if you believe you have the capacity to repay it fully and in time.
Otherwise, you might end up getting your business caught up in the cycle of debt payments.