Small Business

A Guide to Short-Term Business Loans

Posted by Factor Funding Co. on June 25, 2013

A Guide to Short-Term Business Loans

Small businesses are often dependent on credit, especially in the beginning stages. However, many business owners are finding it harder than ever to qualify for traditional business lending due to the tightened economic environment. This is where short-term lending can be a huge help to entrepreneurs. Short-term lending, if used responsibly, can help business owners keep their ventures going, even when income slows down or unexpected costs pop up. However, getting approved for these types of small business loans can be a bit tricky for new entrepreneurs.

Why is Short-Term Lending Important?

Short-term lending is one of the most important factors in business operation in the U.S. Most companies, even large corporations, use short-term lending on a regular basis to cover their basic costs of business operations, small business growth, and payroll expenses. In fact, this type of financing is so important to the business market that when credit was frozen during the Great Recession of 2008, the course of business essentially stopped because companies were unable to get access to short-term loans.

How to Get Approved for a Short-Term Business Loan

An established entrepreneur generally has no trouble getting a short-term business loan. In most cases, banks are willing to offer loans on short terms much more often than on long terms because the amount of risk is lower. However, individuals who are just starting up their businesses may have a particularly difficult time getting their applications approved, since they have no record of profitability or hard business figures to back up their ability to repay the loan.

In this case, it's important for an entrepreneur to have a comprehensive business plan that covers income and expense projections for the first three to five years. The numbers in the plan should be based on industry averages and should include variables for periods of slow revenue. Along with a business plan, a new entrepreneur may have to put up collateral to secure the loan.

Affording a Short-Term Loan

The one caveat about short-term loans is that their interest rates are typically higher than the rates for long-term loans. However, when the economy is slow, banks often reduce these rates to the same rates as long-term loans or possibly even lower, in an attempt to encourage companies to apply. Cash-strapped entrepreneurs should jump on a low rate promotion as soon as possible to avoid higher charges later.

Small business owners who need capital to grow their companies or keep them running should inquire about the possibility of using short-term lending. Taking advantage of this financing option can help them get the needed cash flow to continue operating successfully.

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