Getting a loan might not be attractive in the eyes of an individual entity, but this is not the case for business entities. Personal debts are not encouraged because it makes you more likely to spend money on things that you don’t really need at the moment. However, when it comes to small to medium-sized enterprises, a short-term loan is something that can help their businesses in some circumstances.
WHAT IS A SHORT-TERM DEBT?
Investopedia defines a short-term debt as a short-term or a current liability that is either due within a year or less. This type of loan can turn things around when the company is in need of quick money. However, it is known to be more costly to pay compared to a long-term loan because of a higher APR or annual percentage rates. This means that a debtor will be paying the interest for a shorter period of time.
The short-term loan has a “variant” or a slightly tweaked version called short term installment loans. Instead of paying the debt at one sitting, the debtor will have an option to pay via installment basis, as long as these installments are within a year or 12 months. This small tweak makes a significant change in the loan. With a short-term installment loan, the debtor can pay the money owed with lower interest rates without surrendering the fast money benefit of the short-term loan. More of its benefits are shown below.
Just like any other thing, a short-term loan has some pros and cons. That’s how this option is perfect for some options, but not for some. Here are the pros and cons of a short-term installment loan.
1. Easy cash flow – when your business needs quick cash flow, a short-term loan is one of the easiest ways to get one. Easy cash flow is a life saver for seasonal businesses because it can be used as funds for additional inventory during the season peak.
2. Useful for building up credit – when your business is relatively new, you’ll have a hard time getting a loan in banks and other financial institutions. Banks can consider giving you a bigger amount of loan if you successfully paid your previous loans.
3. Can be used for opportunities, as well as emergencies – a lot of businesses can rely on a short-term installment loan when things go bad because of a reckless decision and they needed money to fix things. Banks can offer them assistance. This will make a business bounce back faster and start profiting again.
The fund can also be used for new opportunities. If a business is getting more customers, it is likely that the capacity of machinery to produce more supplies is getting weaker. With this quick funding, a business can buy better machinery to support a bigger customer base and make a bigger profit than before.
4. Has interest-only option – this is both a pro and a con. A pro because you’ll only have to pay for the interest in earlier months, and a con because you’ll have to pay for a larger sum when the credit is due. This is written on the pro section because the debtor can re-use more money from the debt for usage or investment.
1. Early repayment penalties – this happens when you decide to pay the debt earlier than the due date. In theory, this looks like a good deal for the creditor because he won’t need to make an effort to collect the debts. However, in a business sense, the creditor will not be able to collect more interest if the debtor pays early.
2. You might get addicted to it – small-term loans can get you quick funding for your needs. However, this is not a good option if you’ll depend on all your opportunities or problems with this kind of funding.
3. The risk is higher – this is because you’ll have to pay for the loan even if your business happens to fail. In every business, the possibility to fail is always present and there is always a risk in every business decision being made. You’ll pay for the original amount, as well as for the interest hooked with your loan.