How to use a short-term business loan to your advantage
Short-term business loans could be exactly what your business needs to get to the next level. If your business is looking for money that can be paid back quickly, there are many options available. The best reason, of course, to take out a short-term business loan is if you have a quick turnaround on a project or inventory.
Is a short-term loan right for my business?
There are many ways short-term business loans can make sense for your business when utilized properly, but that doesn’t mean it’s the right fight for everyone. Primarily, a business owner should consider the purpose of the loan. This aspect is critical.
A survey shows that 57% of business owners would prefer a shorter loan over a long term loan in order to cut costs, fees and expenses. This is absolutely one of the primary advantages. However, there are instances where a long-term loan would make more sense because the borrower would have more time to utilize the funds. Business owners need to consider how quickly they will be able to payback the loan to avoid any potential issues down the road. Going into default with a lender is likely the first step toward closing the doors of your business.
Short-term business loans for commerce businesses
If you’re in the business of selling goods a short-term business loan may be right for you. Successful commerce businesses go through their inventory many times throughout the year. Therefore, if one business loan can purchase all of your inventory, it’s possible to flip that inventory multiple times over before paying back the loan. This is an ideal situation and precisely how to leverage your business for growth.
More than half of businesses utilizing this loan type are using it for inventory. It makes much more sense to go with the short-term options in this scenario because the costs will be considerably lower and inventory should be “flipped” rather quickly.
Short-term business loans for construction companies
There’s definitely a reason short-term business loans are so popular in the construction industries. They work so well with the business model. Many companies “pay it forward” in a lot of instances on projects: buying materials, financing necessary equipment and paying employees up front to get paid on the back end of the project. This can stall many projects and keep many companies out of the conversation if they cannot afford such initial costs.
With a short-term business loan, a construction company can purchase everything they need. Then they can complete the project and pay back the loan. Knowing you have access to the capital also gives you an advantage when bidding on projects that may seem out of your range at first.
Short-term loans for any industry
Although some businesses have the ideal model for the short-term loan, it can still be used advantageously for just about any business.
If you’re looking to grow you may be wanting to open a new location or office space. A short-term business loan will help you cover the rent or mortgage payments while you work to get that new space profitable.
Especially if a business is looking to open a new space, they will also be hiring. These loan types will give you the opportunity to hire more people up front until revenue kicks in. These loans are great for bridging the gaps while you take steps forward with your business.
How short is a short-term business loan?
The quick answer is: as short as you want.
There are loans you can pay back in one month without additional penalty. So, technically, the minimum term length would be a month, but obviously this is shorter than most businesses would want to return the money.
Loans in the short-term category can go out as far as 36 months but most fall in the range of 6 to 15 month term. These loan types are ideal for people with a turnaround time in months.
How is a short-term loan paid back?
This is a great question because there are a number of options depending on your approval and need.
If you have any experience with working capital loans or merchant cash advances, you’ll know that payback options are typically quite aggressive. Although this has been the case for many years, a lot of lenders are starting to open up new opportunities for monthly options.
Basically, the payback terms are either daily, weekly or monthly.
The Daily Draw:
- Typically drawn directly from the business bank account 22 times a month, depending on how many business days there are.
- Allows for a smooth payback over time instead one lump sums every month. This can be draining if not timed properly.
- The daily draw sometimes scares owners away but can be planned an budgeted to work to your advantage.
- Provides the lender security in receiving a portion of the payback on a daily basis
Weekly and Monthly Options
You can be approved for one of these options if you have personal credit above 700 and the business bank account has no or minimal negative balances. Most financing programs people are used to involve a monthly payment. If you have the right business profile and want the flexibility to leverage the entire sum throughout the month.
Building Your Business Credit
One of the great, over-looked advantages to taking out a loan for only a short amount of time is the fact that it will help your business credit. Paying back a loan in full looks great to creditors. So taking out a short-term loan can be a cheap way to send a signal to lenders that your business is trustworthy. That way when you need a larger sum, lenders are more likely to approve you for that loan.
This will help your business build a strong profile for years to come and will give your business better opportunities down the road.
29% of Startups Fail Because They Run Out of Money
That’s right. Studies show that 29% of all startups fail because they run out of money. The only reason for failure that outweighs this metric is there not being a market need for the product. Although it may be more likely that there are many other factors that can lead to businesses running out of money, it’s definitely the life blood of business.
These loans can help bridge seasonal gaps in your business, allowing you to continue paying employees and bills during the slow times of the year. Once your business is accustomed to the normal cycles it will be more of an advantage to leverage the extra capital for growth.
You don’t have to close your doors just because you have a cash flow problem.
Don’t let new business pass you by
One of the biggest reasons businesses fail is by not being able to acquire new business. Surprisingly, many businesses are afraid to bring on new clients because they don’t have the capital to deliver. Don’t let this be you. Bid on that big project. Leverage your business to capitalize on these opportunities.
At least applying for short-term business loans will let you know what the options are before pulling the trigger. The more information you have the better informed decisions you can make for your business.
The question you need to ask yourself before taking any loan is: what will the funds be used for? Most business owners find short-term options to play to their advantage and keep costs down, but it doesn’t work for every situation.
Contact Flex Capital Group today and see if you qualify and our experienced account executives can let you know what your options are. Call us today at 888-583-9497.