The Dangers of Short Term Business Loans
All types of loans, with no exception whatsoever, come with sets of advantages and disadvantages. Sadly, borrowers are more interested in finding out about the perks than the pitfalls. This leads to them closing in on deals they come to regret. In this article, we’ll tackle the commonest perils affiliated with short term business loans. Knowing what these are will let you know how to approach them and make a 100% informed decision.
Top Perils of Short Term Business Loans
Short-Term Means Little Money
Short-term loans are usually limited to small amounts of money. In the best-case scenario, they can go around $1,500 or lower. Therefore, short loans can be used only for minimum expenses such as minor office repair, or some bills.
Very High Interest Rates
The shortest term of a loan is, the higher the interest you’ll have to pay on it becomes. Lenders have to make a profit and the only way they can do this is to pump up the interest rates. You can easily avoid being victimised by this: just shop around and compare multiple offers. Getting a loan with a longer term is more feasible than one with a short term, that’s for sure.
This is in the light of the fact that short term business loans can be handed out by investors. The main problem with this is that these investors often want to be repaid in shares in your company. “What a fantastic deal!” you might exclaim – wrong, it’s not. In some cases, these investors can make more money than you do. Needless to say, that would be a catastrophe.
Really think about it! One of the biggest disadvantages of short term business loans is that they underline the signs of a financial instability in a business. While it might seem harmless (and a bit too expensive in the long run, to be honest) it might indicate that the company might have a bad financial management. While it is not necessarily true, it could definitely be a huge turn off for the external investors. We advise you to try to get your loan from a credit union, bank or alternative lender (besides the angel investor).
Greedy lenders will always try to make you borrow more money than you actually need. Couple this with the huge interest rate and the short repayment term and you’ve basically cut the branch under your feet. Never let yourself be tempted by a loan that looks too good to be true. It’s just a mechanism used to make you more indebted than necessary.
A Short Business Loan Doesn’t Guarantee Any Equity
Usually, small business loans do not give you access to the amount of money in your balance. If you want more money, the only way to get it is to apply for another loan.
Short Terms, Frequent Payments
Unlike long-term loans, when monthly payments need to be done, the majority of short term loans require weekly, if not daily payments. If your cash flow is constantly fluctuating, this way of repaying the loan might become challenging and a bit annoying. If you know that your business had troubles with keeping up with all the small payments in the past, consider and negotiate the frequency of the payment schedule before signing the agreement papers.
Due to the nature of short term business loans, one can always spiral down in more and more debt. Because the sums from these loans are generally lower than those you’d get from other loans, you’ll keep on borrowing on a short-term. Before you know it, you’ll develop a habit for it and increase the chances of getting in so much debt that you’ll have to declare bankruptcy. The need for a short term loan is usually proof that something in your company doesn’t work quite as it should.
Instead of borrowing all over again, try to pinpoint what the underlying cause is and take care of it.
The Bottom Line
In the last years, only 50% of the businesses didn’t make it past the first five years of activity. This percentage might be an issue for the companies that desire to get financing on a long term basis, and might push the business owners to take serious risks with their financial approach. It is true, short term loans can help companies get out of the cash-flow jam. It is the perfect solution for businesses that generate revenue quickly, on a daily basis. Again, if you are in a desperate position where the capital of your business is not secured, a short-term loan can solve your issue in no time, and you can repay the loan back without any apparent risk.
Even so, not many business-owners afford short term business loans. The vast majority stay away from them even if they can repay them. Business Loans is a good source of valuable information concerning the risk you’re exposing yourself to by borrowing money short-term. We advise you to get a normal, long-term loan, even if it looks more disadvantageous at a first glance. You will get a better interest rate, however, and sometimes that’s all that matters.