Maximizing Cash Flow with a Short Term Business Loan: Is It

There are many reasons why an entrepreneur might take on debt but, majorly, there are two purposes why a businessperson would take a short term business loan: managing cash flow or funding growth. Both are beneficial for a business’s success. But like with any loan, a sound strategy is required to ensure that taking on a debt does not adversely affect the business and strain its fledging financial health.

Steady cash flow management is vital to the survival and growth of any business. Without the balance, issues such as unexpected expenses or inconsistent cash inflow during low revenue months can jeopardize daily operations. To overcome such situations, businesses tend to look at a short term business loan as a viable solution to keep the business running smoothly.

But is this type of business funding suitable for your company? This article will discuss just that -- whether cash flow management with a short term business loan is right for you. At the end of this article, you will understand how short term business loans work, their pros and cons and you can decide for yourself whether you would want to utilize the funding from this loan for cash flow purposes.

What is a Short Term Business Loan?

A short term business loan is a quick and accessible financing option that provides businesses with immediate capital to meet their urgent financial needs. Compared to traditional bank loans, these loans are more flexible and faster by nature, usually lent for a short period, ranging from three months to two years, depending on the lender. These loans are generally easier to obtain as their qualification criteria are more lenient than traditional business loans. All these aspects make this funding option very popular with small businesses and startups when there is an urgency.

What are the Benefits of a Short Term Business Loan?

When you are facing a temporary cash crunch or cash flow challenge, short term business loans can definitely come to the rescue. As they are faster to obtain, often within 24 hours with online lenders, they are a suitable solution for urgent financial needs. Moreover, the qualification criteria are also not high, making them available for even businesses with low credit scores or short credit histories. Lastly, these loans can provide stability due to low revenue seasons or when payments are delayed. This can bring a balance to an otherwise unstable cash flow management. For example, if an e-commerce store needs to stock up on inventory for the upcoming sales season, this type of funding can provide the necessary capital to help the business purchase the products and help them sail through till the peak season. So, in short, the benefits of a short term business loan are:

·         Quick availability of funds

·         Funds can be utilized to meet any financial needs

·         Easy qualification criteria

·         Helps in maintaining cash flow stability during low revenue seasons

Weighing the Risks: Everything You Should Know Before You Borrow

If you’re geared up to apply for a short term business loan, you might want to read about the potential drawbacks. This will help you make an informed decision.

When it comes to short term business loans, the speed comes at a steep price – high interest rates. This is levied to make up for the shorter repayment terms, which can result in overall higher costs if not repaid quickly. Shorter repayment terms often mean frequent repayment schedules – sometimes daily or monthly. This can put a strain on businesses already struggling with cash flow management. And if you are looking for a large amount of funding, then, unfortunately, this might not be the type of loan you should go for. But the worst drawback is falling into a cycle of debt by taking multiple short term business loans at the same time or even in quick succession to cover the repayment. It means to pay the monthly installment of one loan, you take up another and then another. Before you realize it, you have fallen into a vicious cycle of debt that might drain your otherwise unstable financial health. So, before you rush into applying for a short term business loan, remember the following pitfalls that you might encounter:

·         High interest rates lead to an increase in overall repayment cost

·         Frequent repayment schedules might add pressure on struggling businesses

·         Limited loan amount making this type of funding ineligible for large projects

·         Potential for a vicious debt cycle if the loan is mismanaged

Should You Consider a Short Term Business Loan?

There is no easy answer to this question. You now know the benefits and pitfalls of opting for a short term business loan. But at the end of the day, the answer depends on your business needs, financial situation and a solid strategy to handle the repayment. To make an informed decision, it is important to keep a few points in mind:

·         A short term business loan can be a viable option if your business needs urgent capital.

·         It is always advised to err on the side of caution by accepting that high interest rates and frequent repayment schedules can make these fundings more expensive in the future and might put pressure on the financial health of the company. You would need to assess whether your company can repay the loan because defaulting will lead to steep penalties.

Conclusion

A short term business loan can be a powerful weapon in your financing arsenal for managing cash flow challenges and resolving urgent financial needs. While they provide quick funding and flexible usage, borrowers should not forget that they come with high interest rates and shorter repayment periods, too. You can decide if this funding is the right fit for your company only by weighing the pros and cons of the loans and understanding how to best utilize them for your business.

So, think hard and consult a financial adviser, if need be, before rushing to apply for a short term business loan.