Short Term Business Loans

By: EconomyWatch Content   Date: 28 December 2009

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Short term business loans are financial aids extended to new and established businesses for a period as short as 90-120 days to as long as three years. Such loans are basically a quick-fix solution for small cash flow problems, which may be recovered in a few months. 

A short term business loan is typically acquired by a business when its accounts payable schedule falls short of its sales cycle. By helping acquire sufficient working capital, such loans enable to ‘bridge the gap’ and cover the deficient accounts payable. 

Short Term Business Loans versus Line of Credit

Short term business loans are often confused with a business line of credit. However, in reality, they are fundamentally very different. A business line of credit is a predetermined amount extended to a borrower, which is utilized by the business as and when the need arises. The repayments under such loan agreements are also extremely flexible.

 

A short-term loan, conversely, has a fixed loan amount, which is offered in lump sum. Such loans also have a fixed commencement and conclusion dates. Additionally, once the loan is paid-off, further borrowing is not possible.

 

Short Term Business Loans: Types

Short term business loans can be broadly categorized into:

 

·        Secured loans: These loans can be obtained by pledging an asset as collateral, which may be a business asset, such as inventory, equipment or account receivable, or a personal home equity. Collateralizing short term business loans enable to benefit from low interest rates, since it reduces the lender’s risk.

·        Unsecured loans: These loans do not require any asset-backing, and thus increase the risk of the lender. Unsecured business loans are consequently offered on the basis of a business and its owners’ credit rating. Borrowers are required to furnish certain documents, such as balance sheets, cash flow statements and tax returns, to qualify for such loans. Startups, which do not possess such documents, are required to present a business plan, with personal credit reports of the owners.

 

Short Term Business Loan: Benefits

A short term business loan is a versatile, flexible and easy-to-use financial aid. Other advantages of these loans are:

 

·        Facilitates control over cash flow, along with increasing investment in a business.

·        Removes dependency on other, less favorable sources of credit, such as bank overdrafts and working capital loans.

 

Finally, short term business loans can be obtained by small, medium as well as large businesses.


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