When seeking business financing, there are a few options available to business owners. Small businesses often find success in short-term financing when competing with larger corporations for loans. Short-term financing allows a business to pay a higher interest rate or fee to speed up the processing time. Depending on the owner’s financial situation, taking out short-term debt can either help or hinder future business.
Pros of Seeking Short-Term Financing
Short-term loans were designed because even new companies can qualify for business financing. When a traditional lender offers a loan, they are looking for a specific amount of annual revenue and financial history. With a short-term loan, newer businesses can work on building their history from the ground up and do it with very little annual revenue.
Businesses need to be operational to start earning money, and short-term financing can get them up and running in as little as a few hours. This quick approval process, compared to the sometimes month’s long process of traditional vendors, gets the business running in a fraction of the time. With the digital process of applying, borrowers can avoid the hassle of managing paper documents and in-person meetings for approval.
Part of the financial history that applies to seeking a traditional loan is an excellent credit rating. Short-term lenders appeal to businesses with less than fair credit ratings because they don’t require a substantial history of borrowing money.
Cons of Seeking Short-Term Financing
Having less than optimal credit will cost a business in the long run if it is not turning a profit and paying off its loan. Business financing acquired through short-term means comes with higher rates known as factor rates. Unlike interest, factor rates are consistent through the lifetime of the loan and will require the business owner to pay more money each pay period.
Late payments will be more detrimental to a business with short-term financing as opposed to more traditional loans because of the accelerated payment schedule. Business owners can expect to make payments weekly in comparison to monthly or bi-monthly payments with traditional lending options. If a business defaults on the short-term debt, it may face repercussions that don’t apply in traditional lending scenarios.
Taking out a traditional loan is complicated for small businesses that do not have the revenue and credit history required. Short-term loans, while riskier at times, can provide the necessary financing to get a small business off the ground and turning a profit until they are ready to progress to long-term traditional methods of financing.