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Let’s discuss the benefits and drawbacks of a business term loan. It’s common for business owners to think of 5, 10 or 15-year loans when they’re thinking of getting financing. However, these long-term loans are not always the best option. Business term loan could be a better choice depending on your and business needs. Here are some examples of situations when a business term or short-term loan is likely a better fit.
It’s always important to take advantage of these opportunities as they come. A business term loan will be able to get you the cash you need quickly. It’s likely that you will be able to sell this inventory fast. There is no need to take out a long-term loan with interest compounding in a situation like this.
Starting on a new project can require upfront costs. You may not have the the required funds while you have to wait for receivables to come through. It can take 30 or 60 days before you get paid leaving a new project on the sidelines. Short term loans are a great option to get these projects kickstarted!
It’s common for a seasonal business to need capital during their slow season or cover short-term debt. These loans are a great option for a restaurant in a beach town looking to add more seating preparing for their summer season as an example.
In the unfortunate situation that equipment essential your business stops working a short-term loan can be a great option to get things going again quickly. An example of this is a dentist having issues with his x-ray machine or a chef with his oven. This equipment is vital to keep operations running so a business term loan can be a great option on these situations.
The reason that short term loans are best for the situations above is because they are being used to solve a business term need. There will be revenue generated relatively quickly and the loan can be paid off fast. As a result of this the total cost of the loan is lower than a long-term option as the interest is accruing over a shorter period. For example, the repayment for a $100,000 loan over 5 year paid monthly at 6% with no fees would be $115,996. The repayment on a $100,000 loan over 12 months loan paid weekly at 29% with no fees would be less at $115,476.
A lot of businesses decide to take a business term loan as they don’t have the time to wait for more traditional financing or sometimes because they do not qualify. A lot of banks are a lot more selective of the business that they will fund than some of the lenders that offer these types of loans. Banks are typically more focused on funding larger deals to well established businesses. A lot of lenders offering short term loans saw the opportunity to fund these businesses that they believe are still credit worthy. While every short-term or business term loan lenders have different minimum qualifications. If you are at least 6 months in business, have a 500+ FICO score and deposit at least $10,000 a month you can typically qualify.
The application process for these loans is very simple and some lenders require as little as 3 months of recent banks statements and a signed application. Other lenders may also need a recent tax return, balance sheet and Profit and loss statement especially if you are looking for a larger loan amount.
A lot of these lenders are focused on customer experience and unlike banks have invested a lot in their technology. As a result of this they can typically issue an approval in as little as a few hours. You can be funded as quickly as 24 hours from the time you applied.
Although it is not the case for every business or short-term loan certain lenders will refer to these loans as unsecured because they don’t require any specific collateral to receive the financing. This is great as it allows business without a lot of assets to qualify for financing as they might be declined for an SBA loan as they do not have enough collateral. The benefits of a business term loan adds weight, below we will discuss the drawbacks.
The speed and ease of getting these loans results in the loans being at a higher rate. The loan needs to be paid back in a shorter amount of time and the lenders require little documentation. This is why this type of financing they is considered high risk financing for the lenders. The rates can be high for a business term loan. It’s important to consider the total cost of the financing. Short term loans accumulate interest for a shorter period of time. It’s total cost may actually be less than a longer-term loan option.
Due to the business term loan nature of this product the repayments are made either daily or weekly as oppose to monthly for a traditional loan.
There are typically processing fees associated with these loans. These fees typically range from 1.5%-3.5% of the loan amount. The fee is typically taken out of the loan amount do let’s say you are funded $100,000 and the fee is 2%. You will receive $98,000 in your account when you are funded.
Based on the business term nature of these loans, the max loan amount for most short-term lenders is $1,000,000. If you are looking for a larger funding amount than that it is best to go to a bank for a traditional loan.
Short term business loans are one of the most popular types of financing and are a great option for business owners. The benefits and drawbacks of a business term loan can be confusing, let us know if you have questions. The application process is simple, and you will receive the financing quickly unlike a traditional bank loan. These lenders have great technology which makes the typical painful process of obtaining financing easy! Apply when you’re ready!