How Start-Ups Benefit from Short-Term Loans

Short-term loans are popular among start-ups to maintain a positive cash flow. Financial challenges seem to be a lot to tackle when you dip your toe in the business world. It takes months – and sometimes years – to take hold. While overdrafts and crowdfunding are mostly sought-after among new entrepreneurs, there, of late, has been a change in the course of trends.

Small business loans are a much better alternative to fund the gap in your cash flow because overdrafts are exorbitant, and they, including crowdfunding, do not let you borrow a large sum of money. Short-term loans can last up to five years and are not subject to any collateral. In the event of a poor credit rating, the lending amount can be restricted, but you will still get a better deal.

How start-ups can benefit from short-term loans

Here are the ways how small loans can benefit start-ups:

• They are a perfect solution to deal with a poor cash flow

Your low sales and the seasonal nature of your business can hinder the flow of cash, making it challenging to meet your day-to-day expenses. For instance, you cannot halt payments of your workers’ wages or salaries. Small loans can be fruitful in the event of poor cash flow.

Understand the fact that these loans are just aimed at funding your temporary cash flow problems. If you often have to rely on external funding sources, even if you run a seasonal business, you are asking for it.

Though business loans are more affordable than overdrafts, it cannot be refuted that they are expensive and can cost you a small fortune if you find it harder to stick to the payment plan. If you need a paltry sum, you will be under an obligation to pay off the debt in full. Make sure you are not cash-strapped again; otherwise, you will end up in a constantly ongoing cycle of debt.

• They help take advantage of business opportunities

The business world is complex and dynamic; you have to be quick off the mark to streak ahead in the competition race. Small loans can help you take advantage of a business opportunity when you do not have enough cash.

Whether you need to buy something in bulk to save money or you simply want to hire new staff to ramp up production, start-up business loans are the best bet to fulfil your goals.

• They can bail you out

It is good to brace yourself for any unexpected situation that can have your back against the wall. For instance, A customer’s dissatisfaction with using your overhyped product can attract heavy penalties.

Likewise, you may end up investing your money in an unsuccessful project. Once the money is lost, you cannot get it back. These situations can hamper the productivity of your business, but small business loans can bail you out.  

• Equal opportunities for all entrepreneurs

Whether your credit rating is good or bad, you will have a fair chance to apply for business loans. Business start-up loans for bad credit are also available; however, a lender will be loath to lend you a larger sum of money. Moreover, interest rates will also be high.

Of course, you cannot escape from the damaging effects of poor credit history, but the good thing is you can easily apply for these loans, and lenders entertain applications from subprime borrowers as well.

• They are personalised

Every start-up will have a different financial situation so that no same loan offer can be made to all entrepreneurs. Lenders will peruse your credit history, business condition and growth plans to offer a deal tailored to your needs.

Based on your current cash flow situation, the repayment plan will be set up so you do not struggle to continue to repay the debt. In case you see any harmful impact on your cash flow down the line, you can ask your lender to put you on a different payment plan.

• They are quick

There are times when you may need an instant injection of cash for your business. The instant disbursal will let you stay ahead. You just need to fill in the form online and document your financial condition.

Your lender will assess your credit profile thoroughly, and if approved, you will get money in your bank account. The entire process is done so fast that you will get money on the same day.

Bear in mind associated risks as well

There is no denying that small business loans can help fund a gap in your cash flow, but do not make a decision based on their features. Remember that all types of loans are expensive, and they can be bad if you take them out without analysing your financial condition. Here are some risks you should pay heed to:

• These loans can be expensive even if your credit rating is good and you need a small sum of money. They will be more expensive when your credit score is poor.
• Lenders are not bound to change your payment plan in case you struggle to keep up with payments. Make sure that you have a backup plan to settle your debt if your business is not making enough money.
• There is no guarantee that you will get the nod for these loans. Research and explore other options.  
• The application process does not take too much time if the amount is small, but it can take a few days if the borrowing sum is large.

To wrap up

Short-term business loans can help start-ups to fund the gap in cash flow. These small loans are quick and can meet various types of your business needs. However, these loans can be expensive.

At the time of applying for these loans, you should carefully assess your repaying capacity so you do not fall behind on payments and rack up the debt. If you are unable to decide whether you should use these loans, you should consult a financial advisor.