Both debt and equity financing have a place in small business finance. When a company is just getting off the ground, debt funding, which includes loans, can be tough. Instead, start-up companies may have to rely on the owner’s savings or loans from friends or family for their early funding. Short-term business loans or other forms of short-term funding become necessary when the company has been in operation for a year or more.
What is the definition of a short-term loan?
A short term loan is one that is taken out to meet a short-term personal or business capital requirement. Because it is a form of credit, it entails repaying the principal amount plus interest by a specified due date, which is normally one year after the loan is obtained.
Short-Term Loan Characteristics
Short-term loans are so named because they must be repaid in a short period of time. It must be paid off within six to a year – at most, 18 months – in most situations. Any loan with a term longer than that is referred to as a medium or long-term loan.
Long-term loans can run anything from a few months to 25 years. Some short-term loans don’t have a set payment schedule or a deadline. They just permit the borrower to repay the debt at his or her own speed.
Short-Term Loans: What They Are and How They Work
Short-term loans occur in a variety of shapes and sizes, as shown below:
- Cash advances from merchants
This form of the short term loan is technically a cash advance, but it functions similarly to a loan. The lender provides the borrower with the funds he or she requires. Allowing the lender access to the borrower’s credit facility allows the borrower to make loan payments.
- Access to credit lines
Using a company credit card is similar to using a line of credit. A credit limit is established, and the company can draw on the line of credit as needed. It makes monthly installment payments on whatever loan amount has been taken out.
- Cash advance loans
Payday loans are short-term emergency loans that are relatively simple to get. They’re available from even high-street lenders. The disadvantage is that when the borrower’s payday arrives, the full loan amount, plus interest, must be paid in one big sum.
- Loans taken out on the internet or in installments
It’s also extremely simple to obtain a short-term loan because the entire process is completed online, from application to approval. The money is wired to the borrower’s bank account minutes after the loan is approved.
- Contact customer service
Another option is for the consumer to look up their lender’s customer service number, call it, and ask for assistance in applying for a short-term loan. The staff will then guide you through the application process, whether you apply online or using the mobile app.
The existence of short-term funding for existing small firms is critical to the effective operation of our economy. Small enterprises cannot function without short-term financing. They are unable to purchase inventory, meet working capital requirements, or increase their customer base or processes.