There are plenty of types of short term business loans, but their goal remains the same; to get your business to the next level or to have additional capital, or even to solve a temporary cash-flow problem. If you have a cash flow problem that isn’t necessarily that problematic, you can opt for a short term loan instead of a long one.
Essentially, a short term loan is a kind of loan that is used to support an immediate need for a cash flow of a business. Just like other credit types, the short term involves borrowing a principal amount and is paid with interest monthly in a span of a few weeks or months. Before you take a pick from these choices, you can use a commercial loan repayment calculator to carefully budget and appropriate your business’s cash flow.
Here’s what you need to know about the types of short term business loans and how they work.
Merchant Cash Advance
A merchant cash advance isn’t necessarily a loan as it is a type of cash advance from a lender. The lender will give you a principal amount of money, and it will be paid with your business’s future credit card revenues, so technically, it can still be called a loan.
Merchant cash advances are typically more expensive than most loans as it is paid through the business’s credit account. Whenever a transaction happens in your business’s credit account, a percentage will be deducted from the amount, right even before the money goes to your business’s credit account. This can happen daily and will only stop when the principal amount, along with interest is paid entirely.
Probably one of the best things a merchant cash advance offers is its ease in getting approved. Also, merchant cash advances are accessible for businesses with no credit or with poor credit.
Lines of Credit
A line of credit works like your business’s credit card. Whenever your business needs to borrow a certain amount for whatever reason, your business can tap into this cash flow whenever required. Just like a credit card, there is a limit as to how much you can borrow from this credit line.
Whenever an amount is borrowed, you will be paying monthly installments until the entire amount is paid off. The payment will go to both the principal amount and the interest. The best advantage you can have when using this type of short term loan is that it has a lower annual percentage rate than any other short term loan.
Vendor Credit
Also known as supplier credit, a vendor credit is an excellent way to get a hold of your existing cash flows. It works by having one or two of your vendors to create an arrangement where you will pay for a product or service instead of paying by cash on delivery. The repayment period typically consists of 60 days at maximum and 30 at minimum.
Also, as long as you regularly pay on the due date, there is a chance that you won’t have to pay for interest at all. One more thing is that when you pay the due amount earlier before the repayment period ends, you will get a discount, which is helpful if your business is in a pinch.
Payday Loans
This type of loan is one of the most common short term business loans out there in the market. This is mainly because of its ease in getting approved and is also accessible by people with a bad credit score.
Possibly the only major disadvantage of this type of short term loan is that you have to pay the lender back in one huge lump sum of money in the due date. Also, payday loans can be predatory, along with having a very high-interest rate.
Term Loans
Term loans are highly similar to bank loans, albeit with a shorter repayment period and a higher interest rate, and it is also one of the most common short term business loans in the market. Term loans with shorter repayment periods are quite rare in the market as most of the term loans have a typically long repayment period.
Term loans interest rates come from 8% at the minimum, up to 99%. Albeit typical, people only opt for it when their businesses have a good credit score. However, if you belong in the higher interest rate bracket, you might want to opt for other short term loans that have a lower interest rate.
That said, term loans are best with businesses with an excellent credit score as they can have lower interest and better repayment terms.
Takeaway
Short term business loans are mostly used to solve temporary or not very serious cash flow problems. However, even if they are easy to access for most businesses, they can be costly as most short term financing methods tend to have a very high-interest rate. Consider opting for short term loans carefully as it can help your business stay afloat, but could also ruin your business’s credit.
