Just what are short-term business loans?
If you’re asking this question, you’re probably looking to take out a business loan.
First thing first, that’s a good move. Whether you’re looking for funds to start a new business, expand an existing one, or settle an emergency, business loans are an ideal source of funds, as long as you use them prudently.
Although there are different types of business loans, they can be broadly categorized into two groups: short-term business loans and long-term business loans.
If you’re eyeing a short-term loan, you want to know more about them before you apply. Keep reading for deeper insight.
What Are Short-Term Business Loans?
You certainly already know that a short-term loan is a loan you that has to be repaid within a short period of time. But how short is short in the context of loans?
In general, a short-term business loan runs anywhere from 6 months to 18 months or slightly longer, depending on the lender.
A shorter duration has its advantages. For instance, you won’t be in debt for a long time. Long-term can negatively affect your business credit score if you’re not paying up the installments on time.
That being said, a short-term loan has more unique features besides the duration of repayment. Let’s delve deeper into what it is exactly.
Interest Rates
Short-term loans typically have higher interest rates.
This is because, compared to long-term loans, lenders wouldn’t be able to make as much money on short-term loans, assuming interest rates are the same.
Here’s an illustration:
You take out a $10,000 loan, charging 5 percent APR, and the loan term is 10 years. You’ll pay back $5,000 in interest.
But how much would you pay when you have the same loan amount, with the same interest, but a 5-year term? $2,5000 in interest.
Given the two options, most lenders would rather give out the long-term loan because that’s where more profit lies. But, if they increase the interest on the short-term loan to 10 percent, the interest now works out to $5,000.
This is just an illustration. In real life, it’s possible for a short-term loan to be pricier than long-term loans. So, be prepared to pay more.
The Purpose
When you’re taking out a personal loan, most lenders don’t want to know how you will use the money. But when it comes to business loans, you need to provide a legit business reason.
For a short-term business loan, most of the time you’ll be in an emergency. Perhaps there’s a security breach and you need money urgently to hire a cybersecurity specialist. Or you’ve received a big order and you don’t have enough money at hand to settle it.
Loan Amount
Short-term business loans aren’t large. Don’t expect to borrow one million dollars when you want a short-term loan. Usually, anything below $100,000 will go for a short-term loan.
Know When to Get a Short-Term Business Loan
Short-term business loans have advantages and a fair share of disadvantages. It’s important to know when it’s smart to go in for short-term credit instead of a long-term loan.
Keep reading our blog for more tips on business finance.
