Ranging from equipment loans to seeking loans for expansion and paying off stakeholders or employees, you will come across very few business identities that do not seek financial aid for maintaining a steady cash flow for their business activities. This is a phenomenon that is experienced by every business house once in a while. So, how do businesses get that extra cash they require for fulfilling their financial needs? Short term business loans can bail them out from this situation.
Applying for the loan – The preparation
Once you have identified the need for short term business loans, careful planning is a prerequisite. How will you proceed? There are a few questions that you need to work out so that your vision and goals related to the loan you are seeking is clear. It is after all, someone else’s money you are using as credit.
So, it has to be planned ahead and the expenses have to be kept in mind so that there is judicious usage of the loan proceeds. Check out these questions.
- What is the purpose of applying for the loan?
- What is the loan amount you have decided to apply for?
- Are you in a position to repay the loan or most importantly, do you see yourself debt free in a few years from now?
- How long do you intend to take the loan for?
- Is your business steady?
- Are you sure about the ROI (Return on Investment)
- Have you attained break even?
- What is the current turnover of your business?
- What have you decided about the collateral?
- Do you have collateral against which you intend to apply for the loan?
- How urgently do you need the cash? Can you do without it for the next quarter?
Regardless of whether you apply for the loan or not, the pros and cons of these short term business loans ought to be in your knowledge.
Pros of short term business loans
These are as follows-
- Quick cash – These short term loans are an excellent way to boost your business finances promptly and as these loans are disbursed quite fast, the cash flow can be maintained well.
- Opportunity for growth/expansion – At any point of time, if you find that your business is running short of cash but there is a great growth opportunity beckoning, these short term loans for business can be an excellent solace financially.
Cons of short term loans for business
They are as follows-
- Rate of interest – The rate of interest of these loans is very high. Not only that also, these loans are ‘interest only’ loans, which means you will have to shell out more in the long run. So, for startups in particular, these interest only loans can be a bad proposition.
- Getting into a vicious cycle of loans – If you are not in a position to repay the loan at some point of time, especially after you have made payment of a considerable amount, out of desperation you tend to take another loan to repay this off. As such, you get into a vicious cycle, which will eventually siphon you off into a debt trap.