When investigating lenders and comparing loans for a small business, you may have encountered both long and short-term loans on offer. The differences between the two products can often make it hard to understand which is best. Are short-term loans for a small business good, and what do you need to know?
What are short term loans for a small business?
Short-term loans are sums of money given out and paid back in short spans of time. The ‘term’ is how long the borrower is given to pay back the full amount, usually framed in months. For this reason, they’re for relatively smaller amounts of money. Short-term loans for businesses involve higher interest payments than long-term loans, given the short space of time in which the amount can be divided into monthly payments. These loans can be either secured or unsecured. Secured short-term loans use business assets to give lenders an assurance that they can recoup their losses if the debt payments are not made.
Conversely, unsecured small loans for a small business don’t use any kind of asset guarantee. They often require a personal guarantee from a company director, meaning the director will be responsible for making repayments if the business defaults on the loan.
What are examples of short-term loans for a small business?
One example of short-term loans for a small business is that of a business cash flow loan. These types of loans for a small business is based on the expectation that there is incoming revenue that the business will use to repay its debt. A loan like this can be used to cover seasonality—wherein a business might suffer a slow down in revenue at certain times of year—or to provide a way to acquire assets or make investments.
A business might use a cash flow loan to buy equipment or stock that it can then convert to revenue, paying off the loan and interest in a short space of time. Short-term finance isn’t a tool intended to cover existing debts. It’s designed to be a stepping stone over small but manageable gaps in finances, or to take advantage of opportunities that the business might miss while it waits for the necessary capital. Short-term business loans are best for small and medium-sized enterprises (SMEs) that can manage the risk of borrowing and have the assets to mitigate it.
Are short-term loans for a small business good?
When managed wisely and with expert guidance, short-term business loans can provide financial relief to small businesses and help them continue trading through hard times.
To understand short-term loan options for small businesses and discover the lending options available, contact Business Finance House and speak to our team of financial experts today. We cover business loans in Cheshire, business loans in Liverpool and also business loans nationwide!
