As a small business owner, there are several reasons to consider applying for a business loan. Maybe you’re trying to get your business off the ground or take it to the next level. Or it could be that you’re trying to solve some short-term cash flow problems. Short-term business loans are a potential option for meeting short-term cash flow challenges and meeting other needs that don’t require longer-term financing options.
Depending on the business need you’re trying to fill, a long-term loan might not be the best answer. For example, borrowing to take advantage of a steep discount on quick-turnaround inventory is very different from borrowing to purchase a new warehouse. It may be an oversimplification, but most people wouldn’t use a 30-year loan to buy a new car. The accrued interest would make the total cost of the car too expensive. Instead, it may be worth considering short-term business loans to solve your problem. Here’s what you need to know about short-term business loans, what’s available, and where to look to get solid options.
What is a short-term business loan?
A short-term business loan, sometimes called a working capital loan, is designed to provide small business owners with quick access to the working capital they need to address short-term financial issues. Like any other term loan, you’ll get the loan funds in a lump-sum payment, then pay it off over the term of the loan. Short-term loans include any loan with a term that could be from 3 months to 3 years.
In some cases, however, you may get access to a revolving line of credit in the form of a credit line. Most modern lines of credit also come with a defined term, but unlike a term loan https://onedayloan.net/payday-loans-nd/, you can access your line of credit when you need it, repay what you’ve accessed, and use it again over the term of the credit line. What’s more, you only pay interest on the amount of credit you use.
If your business is experiencing a cash flow crunch or has an opportunity to take advantage of an offer that will generate more profits, short-term businesses can help in both situations. In addition to the fact that 82% of U.S.-based small businesses fail because of cash flow management issues the opportunity costs lost by being undercapitalized can’t be ignored either. Looking at short-term financing as solely bail-out financing would be shortchanging what a business can do with quick access to a short-term loan.
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Is a short-term loan right for my business?
The short answer is probably yes, but it will depend on the reason you’re borrowing. Most of the time short-term loans will have a higher periodic payment than a longer-term loan, but they will likely have less accrued interest-potentially making the total dollar cost of the loan much less. Additionally, for loan terms under a year, APR isn’t the best way to express the costs because of the way APR is calculated, the costs may even appear to be greater than they really are.
For example, if you borrow $10,000 over six months at an APR of 67.5%, you will pay a total of $1,500 in interest cost. Borrowing the same $10,000 at 22.5% over four years you’ll pay a total of $4,800 in total interest costs. Depending on the use case, even at 67.5%, the shorter-term loan could be the right choice. This is particularly true for loan purposes with a defined ROI, like purchasing inventory.