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The Advantages and Disadvantages of Short-Term Business Loans

The Advantages and Disadvantages of Short-Term Business Loans
Short-term business loans are one of several financial tools available to help fund your operations as a small business owner. At some level, all businesses rely on financing.

Small businesses, however, often have far less wiggle room in their accounting or bank balances than larger corporations, and are therefore much more reliant on funding. 

Likewise, knowing how to secure that funding, and put it to the best use, can make a huge difference in whether or not a small business sinks or swims. 

To that end, it’s important for small business owners to understand the advantages and disadvantages of the different kinds of small business funding choices that are available. In this guide, we’ll take a closer look at short-term business loans. 

We’ll discuss what they are and how they work, where they differ from more traditional (longer-term) small business loans, then explore their advantages and disadvantages in detail.

What are Short-Term Business Loans?

Short-term business loans are a type of business loan that provide cash as a lump sum, and then require repayment over a set period of time, with interest. 

These may be available in secured (collateral-required), or unsecured (no collateral required) forms, depending on the lender and qualifications of the borrower.

What are Short Term Business Loans?

Short-term business funding in general is primarily used for short-term expenses and needs, with other financing products being a better option for either ongoing/revolving expenses, or for more long-term expenses. 

There are tradeoffs with short-term business loans, as with all kinds of small business funding, as we’ll explore in more detail below. 

How Short-Term Business Loans are Different

Principally, short-term business loans are different from unqualified or traditional business loans in a way that is made clear in their name: they have a shorter term. 

In practice, this means that short-term business loans (and most kinds of short-term business funding) are designed to be repaid over a much shorter period of time (the loan term) than other kinds of loans or credit products.

How Short-Term Business Loans are Different

n the case of short-term business loans, this is usually a matter of months to a year or two at most, whereas longer-term loans may last for several years to a decade or more. 

This difference plays a role in some of the advantages and disadvantages of short-term small business loans that we’ll discuss in a moment. Short-term business loans may be secured or unsecured, just like other kinds of loans. 

Additionally, in most cases, there are no restrictions or commitments on how the funds from a short-term small business loan may be used by the business, which is the same with longer-term loans.

However, when it comes to qualifications and the amounts available from a short-term business loan, they do tend to differ from longer-term loans, with both more stringent requirements to qualify, and a lower overall lending threshold.

This is because short-term loans represent a larger risk for the short-term business lending companies, as the faster repayment cadence increases the risk of borrowers defaulting or being unable to repay the loan.

Advantages of Short-Term Small Business Loans

The main advantages or benefits of short-term small business loans include:

Advantages of Short-Term Small Business Loans

Short-term business loans can provide much-needed funds for small businesses at a lower net cost than many other options. While the stated short-term business loan interest rates can be higher than the rates for longer-term loans, that doesn’t tell the whole story. 

Usually, interest rates are stated on an APR (annual percentage rate) basis. For a loan that lasts less than a year, the cost of borrowing won’t be as much as the annual interest rate would make it appear. 

A loan offering a 20% APR but lasting for only 6 months would, in effect, have a real APR of 10%. Because short-term small business loans are repaid more quickly than longer-term loans, and lenders get their funds back quicker, they can often cost businesses less than longer-term loan options.

The increased speed of repayment and shorter term of a short-term business loan means that they are best suited for short-term expenses. One of the principles of small business funding is to match the appropriate kind of funding with the appropriate kind of expenses. 

This means that short-term business funding is ideally utilized for things like purchase order financing, temporary increases in staff or labor, and short-term operational expenses that will provide a return within the term of the loan. 

They’re really the best choice for that kind of expense, with other small business financing options being more well-suited to revolving or longer-term expenses.

Though repayments are more frequent with a short-term small business loan than with its longer-term counterparts, the repayment installments themselves are generally much smaller.

For businesses that operate with a high cash flow on a day-to-day basis, this can make it much easier to manage the repayment of a short-term business loan than some of the other kinds of loans that are available.

Disadvantages of Short-Term Small Business Loans

Of course, these advantages and benefits are offset with tradeoffs, drawbacks, or disadvantages, too.

Disadvantages of Short-Term Small Business Loans

The disadvantages of short-term small business loans include:

As discussed in the advantages section above, short-term business loans are best for short-term expenses. The corresponding disadvantage to this is that they are not suitable, and can end up costing you more, if you attempt to use them for longer-term expenses. 

They also make it easier to get into financial trouble in this case, as using them for things that won’t provide a financial return within the short period of time in which the loan must be repaid can make it incredibly difficult to make the repayments without creating additional debt obligations. 

Short-term small business loans typically have a much faster repayment cadence than longer-term loans. Typically a longer-term small business loan will require a monthly repayment of principal and interest. With short-term business loans, that period is often weekly, or even daily.

While the payments are smaller, and that’s definitely an advantage, the frequency can be a disadvantage, depending on the cash flow, income, and expenses situation at your particular small business. 

Because of the faster repayment cadence, short-term business loans are considered a higher risk product by many lenders. 

Short-term business lending therefore typically comes with qualification or eligibility criteria that may be harder to meet than that offered by those same lenders for longer-term loans and credit products. 

A higher credit score, longer period of time in business, and greater monthly revenue are among some of the most common differences in the qualification requirements for a short-term small business loan compared to a longer-term loan.

Short Term Business Loans from BizFly Funding

If you own or operate a small business that is in need of short-term business funding, then consider applying for a short-term small business loan at BizFly Funding. 

BizFly Funding deals exclusively in small business funding, offering a full portfolio of small business financing options that includes short-term small business loans. 

With outstanding service, easily met qualification requirements, and generous loan amounts available, BizFly Funding should be your go-to source for all of your small business funding needs. 

To learn more, get pre-qualified, and start the application process, visit BizFly Funding online at https://bizflyfunding.com.

Frequently Asked Questions about Short-Term Business Loans

Short-term business financing is beneficial for short-term expenses for businesses. 

It makes no sense to take out a longer-term loan, paying interest on the outstanding balance over a much longer period of time, when an expense is immediate, and likely to generate a return on that investment in a short period of time. 

The classic example is purchase order financing – money to purchase inventory, which is intended to be sold to customers, generating revenue and profit, in the near term (a matter of months). 

A short-term small business loan is a perfect choice for this kind of expense.

In general, business loans provide a set amount of money as a lump sum up-front, with easily calculated repayments spread over a period of time. 

They can be relatively easy to qualify for and obtain, and can be used for almost any purpose. 

Compared to some other kinds of small business funding, they can be less costly, easier to get, and more flexible in how they are used.

Small business loans of all kinds are vital aspects of small business funding. 

Of course, it’s never a good idea to take out a loan for more than you think you need, or to take on more debt than your business can support. 

However, responsible use of small business funding, including short-term business loans, is a necessary part of funding business operations for almost all small businesses today. 

Every short-term business lending company will have somewhat different qualification requirements for a short-term business loan. 

Most will have a minimum credit score you must meet, as well as a certain number of months or years you will need to have been in operation before you will be eligible for a loan. 

Revenue requirements, either weekly or monthly, are also usually part of the qualification requirements for most short-term business loans. If the loan is secured, sufficient collateral will also be required. 

Depending on the lender and type of loan, you may be able to access $1 million in loan amount. 

Generally, short-term business loans have lower maximum thresholds than longer-term loans, since it is much more difficult to repay a larger sum of money in the short term than it is over a longer term. 

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