Can a Short Term Loan Help Your Business?
BY: VESELINA DZHINGAROVA ON TUESDAY, JULY 26, 2016
All businesses need money. Without cash in the bank, you can’t pay the bills, buy stock, pay wages, or do much of anything. Cashflow is vital and if your cashflow dries up, your business is in serious trouble. In an ideal world, clients pay their bills and you have enough money to keep things ticking along smoothly, but what happens when you need an extra injection of cash in a short space of time – can a short-term loan help?
Short-term loans, also known as payday loans, are smaller loans paid out over shorter periods of time. Whereas you might take out a regular business loan over, say, a period of five years, a payday loan contract is for anything from 3-18 months.
Common Reasons for Short-Term Loan Borrowing
Most businesses take out a short-term loan because they need a quick injection of working capital. If an unexpected business opportunity arises and you need to move fast, you might not have time to approach your bank for a loan. Or, if a key piece of equipment fails and you can’t afford to wait for it to be replaced, a payday loan could get you back on track fast.
The Advantages of a Payday Business Loan
Applying for business finance from a high street lender is time-consuming. There will be paperwork to fill in, credit checks to pass, and you will need to explain in detail why you need the money. In other words, lenders won’t hand over any money unless you pass their strict lending criteria.
Short-term loans are much easier to obtain. There are few restrictions and you can borrow the money for any reason at all. Approval is usually very fast – sometimes as little as a few hours.
Paying Back the Loan
A payday loan repayment schedule is no different to any other type of loan. The lender puts in place a repayment schedule that you meet until the loan balance has been cleared. For businesses with good cashflow, this won’t be a problem, but if your cashflow is sporadic, it may be difficult to meet daily or weekly repayments.
The other main disadvantage of payday loans for businesses is that the interest rates are very high. You are essentially paying a big premium for the privilege of being able to borrow large sums of money fast. Since the people who take out payday loans are often high-risk borrowers, lenders temper the risk with high fees and interest rates. However, although medium and long-term loans are usually cheaper, the money is not as easy to obtain.
Short-term lending can work very well for a business as long as you know the rules. If the unexpected happens and your usual lines of credit are unavailable, a payday loan might tick the right boxes. However, you need to be absolutely certain you have the means to repay the loan on schedule, or interest charges and late payment fees will soon start to pile up.
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