How to get short-term loans for your busi­ness


Both debt and equity fi­nanc­ing have a right­ful place in all but the small­est of busi­nesses. If we fo­cus on debt fi­nanc­ing, most small busi­nesses have tra­di­tion­ally got most of their busi­ness loans from com­mer­cial banks in the form of term loans. Those term loans may have short, in­ter­me­di­ate, or long ma­tu­ri­ties. The dif­fer­ent lengths of ma­tu­ri­ties sig­nify not only dif­fer­ent time pe­ri­ods in which the firm can re­pay the loans, but dif­fer­ent pur­poses for the loans as well, ac­cord­ing to www. the­bal­

What are short-term busi­ness loans?

Small busi­nesses most of­ten need short-term loans in­stead of longterm debt fi­nanc­ing. Most term loans, clas­si­fied as short-term, usu­ally have a ma­tu­rity of one year or less. They must be re­paid to the lender within one year. Most short-term loans are of­ten re­paid much more quickly than that, of­ten within 90 to 120 days. Term loans with short ma­tu­ri­ties can help you meet an im­me­di­ate need for fi­nanc­ing with­out re­quir­ing you to make a long-term term com­mit­ment.

Pur­poses of short-term debt fi­nanc­ing

Short-term loans are help­ful to busi­nesses that are sea­sonal in na­ture such as re­tail busi­nesses that have to build up in­ven­tory for the hol­i­day sea­son. Such a busi­ness might need a short-term loan to buy in­ven­tory well in ad­vance of the hol­i­days and not be able to re­pay the loan un­til af­ter the hol­i­days. That is the per­fect use for the short-term busi­ness loan. Other uses for short-term busi­ness loans are to raise work­ing cap­i­tal to cover tem­po­rary de­fi­cien­cies in funds so you can meet pay­rolls and other ex­penses. You may be wait­ing on credit cus­tomers to pay their bills, for ex­am­ple. You may also need short­term busi­ness loans to pay your own bills, i.e. to meet your own ac­counts payable (what you owe your sup­plier) obli­ga­tions. You may just need a short-term loan to even out your cash flow, par­tic­u­larly if your com­pany is a cycli­cal busi­ness.

Qual­i­fy­ing for a short-term loan

In or­der to qual­ify for a short­term loan, you will have to present com­pre­hen­sive doc­u­men­ta­tion to your lender, whether it is a bank, or some other type of lender. The lender will want, at least, a record of your pay­ment his­tory for other loans you may have had, in­clud­ing pay­ment his­to­ries to your sup­pli­ers (ac­counts payable) and your com­pany’s cash flow his­tory for per­haps the last three to five years. You should also be pre­pared to hand over your in­come state­ment for the same amount of time if the lender re­quests it. All doc­u­men­ta­tion should be in a pro­fes­sional for­mat. Your qual­i­fi­ca­tions for a short-term loan will help de­ter­mine whether or not the loan will be se­cured by col­lat­eral or whether it will be an un­se­cured, or sig­na­ture, loan.

Short-term ver­sus long-term loan in­ter­est rates

In a nor­mal econ­omy, in­ter­est rates on short-term loans are higher than in­ter­est rates on long-term loans. In a re­ces­sion­ary econ­omy, how­ever, in­ter­est rates may be low and short­term loan rates may be lower than long-term loan rates. Short-term loan rates are usu­ally based on the prime in­ter­est rate plus some pre­mium. The bank or other lender de­ter­mines the pre­mium by de­ter­min­ing what risk your com­pany is to them. They do this by look­ing at the doc­u­men­ta­tion you pro­vide them in or­der to qual­ify for a short-term loan. Short-term loan in­ter­est rates can be cal­cu­lated in a num­ber of ways. You want to get your lender to cal­cu­late the in­ter­est rate in the way most af­ford­able to you. Take a look at the dif­fer­ent ways short-term in­ter­est rates can be cal­cu­lated and use this as your guide when talk­ing to a bank loan of­fi­cer. Also, be sure that you are knowl­edge­able about the cur­rent prime in­ter­est rate so you can talk in­tel­li­gently to the bank loan of­fi­cer as you ne­go­ti­ate the in­ter­est rate on your short-term loan.

Loans for start-up busi­nesses and small busi­nesses

It is pos­si­ble for a start-up com­pany to se­cure a short-term loan. This is be­cause short-term loans are less risky than long-term fi­nanc­ing sim­ply due to the fact of their ma­tu­rity. Start-up firms have to present ex­ten­sive doc­u­men­ta­tion to the lender, such as pro­jected cash flow state­ments for the next three to five years along with pro­jected fi­nan­cial state­ments for the same time pe­riod. They have to ex­plain where their rev­enue will be com­ing from and how it is ex­pected to be paid. Most start-up com­pa­nies will only qual­ify for se­cured loans from a lender. In other words, the start-up firm would have to of­fer some sort of col­lat­eral to se­cure the loan with the lender. The avail­abil­ity of short-term loans to small busi­nesses is ab­so­lutely es­sen­tial in or­der for our econ­omy to op­er­ate smoothly. With­out short­term fi­nanc­ing, small busi­nesses lit­er­ally can­not op­er­ate. They can’t buy their in­ven­tory, cover work­ing cap­i­tal short­ages, ex­pand their cus­tomer base or op­er­a­tions, or grow. When com­mer­cial banks tight­ened up their lend­ing poli­cies dur­ing the great re­ces­sion and after­wards, small busi­nesses and the econ­omy suf­fered be­cause of these very is­sues.

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