A short-term business loan is a special kind of loan made to small business owners to bridge a temporary gap in the cash flow. The terms for these loans can vary, depending upon your needs. For example, the term of the loan can be for 90 days or up to three years.
Some of these loans are unsecured, meaning the lender requires no collateral. Because the risk is higher for the lender, the interest rate on unsecured loans may be higher. Some loans do require collateral, in the form of inventory, accounts receivable, equipment or other property. These secured loans generally have a lower rate of interest than unsecured loans.
Short-term loans can be a tremendous help if you are a small business owner facing a temporary cash flow problem. Here are 5 situations in which a small term business loan would be useful:
1. Start-Up Costs
Short-term loans can be granted to both new and existing businesses. Therefore, a promising entrepreneur can finance the start-up costs of her business by obtaining a short-term loan. This is particularly helpful if you simply don't have the cash to finance these costs yourself, and need a boost to get your business going.
2. Accounts Receivables vs. Payables
Many businesses are cyclical in nature, and there is often a gap between accounts receivables (cash coming in) and accounts payable (cash going out). If you know this is a temporary situation and your receivables will be coming in quickly, a short-term loan will help you bridge the gap without falling behind on your bills.
3. Short-Term Operational Costs
A short-term loan can cover any short-term operational costs you may have. For example, if you need to hire extra staff during a seasonal push, or a particular piece of equipment to finish a job, a short-term loan can finance your needs so you can get the job done.
4. Emergency Repairs and Maintenance
A short-term loan can help you make it through an emergency situation. For example, if your computer crashes and you cannot run your business without it, a short-term loan can finance the repair.
5. Cash Flow
Short-term loans have a briefer-than-usual maturation periods than regular loans, which makes them ideal for any temporary cash flow situation. If you don't have the money now, but you can depend upon money coming in within a certain period of time, a short-term loan would be a good way to fill the need.
Short-term business loans help in a crunch because they offer immediate approvals, meaning you can get cash quickly to help you through a crisis. However, they should be used with caution because they do generally come with a higher APR than other loans. Think of them as a valuable tool in your cache of small business strategies. If you feel your situation justifies a short-term loan, find a reputable lender and a loan officer you trust. They will help you determine the best loan for your business.
Sarah Baker is a documentary filmmaker and writer currently living in New Bern, NC. Her first book, Lucky Stars: Janet Gaynor and Charles Farrell, will be published December 2009. Read more about her.