Why Choose a Short Term Loan?
What is a short-term loan? The most simple explanation of a short-term loan is one that is repaid is less than a year.
A short-term loan is going to have a higher interest rate than a longer term loan because it often has more risk. It means that your business has to come up with money on a frequent repayment schedule; most often weekly. If your business is inconsistent with its sales however, this might be difficult.
A shorter term length might be great for seasonal businesses that need to rapidly expand but they get the majority of their money only half the year. For tourism businesses, this is common. Think of a ski resort doing 75% of their revenue in the winter, or a wildlife tour company doing the majority of their business in the summer.
A business like this cannot wait several weeks for a bank to make a decision because their revenue is generated over 4 months. Several weeks of decision making might be a month of lost opportunity! This is where a short-term loan might kick in. If the business has a steady stream of cash flow and a solid history, they might get a quick funding time, not have to submit a ton of paperwork, and the decision making process is fast and easy. This means they can expand on opportunity quickly.
Many banks require your business to be tied to a length of time in service, be specific on how you can use the money, or require collateral (
). A lot of businesses choose alternative lenders and alternative funding solutions for this very reason. They want to grow their business and the money might be used in several areas…like maybe payroll for temporary workers or perhaps on sprucing up a waiting area for customers.
Remember, there are many types of short term loans! There is a merchant cash advance (MCA -
), a line of credit, invoice financing, and the actual ‘term loan’. Whatever you pick, read carefully. These types of funding deals are great for small business, but our suggestion is always know what and why you need this type of loan and be educated about it.