Small businesses need short term loans rather than long term debt financing. These short term loans have maturity of around a year or less and are often paid back within a period of 90 – 120 days. These loans help the business to meet their loan and financial requirements without any long term commitments. These are generally helpful in seasonal businesses. For example, those businesses which need to stock up or build their inventory before the holiday season. The loan in this case can be repaid once the holiday season is over.
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Short term loans are also used by businesses to raise working capital and to meet temporary deficit in funds. There are bills which need to be paid or the obligations that have to be fulfilled towards the suppliers. These loans help them to tide over the payroll and expenses of that nature.
Why do small scale enterprises need short term loans?
These loans are needed by businesses to function well and to operate smoothly. Without short term loans, businesses will not be able to buy inventory or cover shortage faced in the working capital. They will not be able to expand the customer base they have and branch out. During recessions as the lending policies get tightened, small businesses and in turn the economy suffers.
- There are large numbers of personal lenders, business professionals, banks, private institutions and microfinance companies, which help the small industries and businesses to avail loan for a short tenure, and if they have the required documents and a well-laid project plan, then they can get the loans without any hassle.
- When a company needs finance to start up, they may secure a short term business loan. The reason being these loans are less risky than long term loans. The start up firms need to present documentation like the cash flow statements, and the projected financial statements for next 3 – 5 years.
- They also need to show the revenue sources and how the loans will be paid. Most of the start up firms however, qualify for only secured loans and therefore substantial collateral needs to be put up.
What are the eligibility requirements for a company to obtain short term loans?
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For any company to qualify for a short term business loans, it needs to present comprehensive documentation to credit unions, mutual banks, regular banks or other types of lenders to meet certain criteria. The lender will need a record of the payment history of other loans to lenders, creditors and suppliers.
- They will also see the cash flow of the company for the last few years. The income statement will also be requested before granting the loan. Based on the qualification the loan will either be secured or unsecured. If it is secured, it will be secured against some sort of collateral.
- The interest rates payable on these short term loans is usually higher than long term loans. These loans are based on the prime interest rate and also the premium. The bank or the lender will determine the premium based on risk of the business. In order to calculate the interest rate, the lender looks at different options. These loans are usually negotiable about the interest rate and the premium that one needs to pay.
Thus short term loans are a necessity and boon to small businesses to overcome their financial needs. However, before a small company tries to apply for a short term loan, it is very important to make a company project, then assess the financial statements and then consider the annual turnovers of the company at a present stage, to get a better idea about what amount of loan can facilitate the growth of the company.
I am Melissa Hamler, an experienced and professional blogger. I love to write blog on various topics, like: automotive, home improvement, business, health etc. You can follow me on Facebook or Twitter for more updates.