Are Short Term Loans the way to go for Businesses?
In the wake of coronavirus, more and more businesses are finding it hard to keep afloat. According to a report in the New York Times, companies will have to rethink their loan strategies. Meaning they may have to take bigger loans, which take more extended periods to pay or roll over the ones they have to a time they have sufficient money flow. However, these measures are to be agreed upon with the lender. Businesses have various loan options. This article will cover the short term credit loans.
Short term credit loan is a generic term which means a loan given to a business or an individual and payable within one year.At the utmost, the repayment period can extendup to 18 months. It is an option most valuable to startups and individuals who have not yet qualified for a credit line from the bank. However, the part of being repaid can be part of a long time loan. The amount borrowed is lower than long-term loans, and in most cases, ranges between $100 to $100,000.
Credit given to a business or an individual is termed generic depending on how cash flows in. Different companies have different cash flows. For example, some places have a steady cash flow through the month, while others have it at certain times of the year. Lenders have short-term credit loans depending on their customers' cash flow, enabling them to have consistency in clearing their expenses. In most cases, the banks will require these loans repaid with the monthly cash flow.
Types of Short Term Loans
Merchant Loan Advance
Though it is an advance, it still acts as a loan. The lender gets to access their customer's credit facility.Whenever their client makes a sale, the lender takes a certain percentage until the full loan repaid.
This type of loan is similar to a business credit card. A business granted a credit ceiling where it cannot borrow above a certain amount. Then the loan repayments are made monthly. However, the credit line's Annual Percentage Rate is far much lower than a business credit card.
Business owners can access short term loans with minimum requirements. The only disadvantage is they have to be repaid all at once with all the Interest accrued. Their interest rate is also relatively high compared to other loans.
These are loans whose whole process is online. Typically when one applies, they only need approval then the money is in their accounts.
As the name suggests, these loans are issued against invoices not yet honored. The lender lends the borrower against the unpaid invoices. As agreed, the lender can take a certain percentage when the invoice gets paid. The borrower gets to keep the rest.
Merits of Short Term Loans
- There are various advantagesto taking loans payable within a short period. These include:
- The Interest incurred is less compared to loans paid within a longer time.
- Since the time taken to repay the loan is short, the lenders find it less risky and easily avail of the loan. The lender also gives funds as there is a decreased likelihood of the borrower's ability to pay to change drastically over a short time.
- Generic loans are also easy to acquire. Smaller businesses or individuals easily meet the minimum requirements for any short-term credit hence offer a much-needed lifeline when the need arises.
The only major drawback of generic loans is the amount of money loaned.
Generic loans are very convenient for businesses, especially startup. They help companies keep afloat during tough economic times, but they also offer solutions to unanticipated cash issues. On the other hand, short term loans provide emergency cash solutions to individuals.