When you are running a business, the profit and opportunity scenarios don’t always remain constant. I, for one, know how opportunities have a tendency to spring up just when you are lagging behind in the revenue sector.
Even if you are not having a bad time with sales, some juicy, amazing or once-in-a-lifetime opportunities might require funds that you do not have at the moment.
So what do you do then? Take a huge loan that will take years to pay off?
The answer is no, as Short-term loans are now widely available. There are many instances in which you should or shouldn’t opt for a short-term loan; here are a few of both:
When should you take a short-term loan?
If your business depends on the season or events that occur in a fixed time of the year
Many businesses are “season-specific”, and these businessmen KNOW when their profit will reach its highest peak.
For example, if you have an ice cream shop, you should take extra measures before summer begins to make sure that your refrigerator and coolers work properly, so that your service is top notch and you make a ton of profit.
This is where short-term loans come into play. Rather than taking an unnecessary long-term loan, why not take a short one and pay it off when the huge profit starts coming in?
If your products are small dollar items but sold in high volumes
If your business involves small dollar products, it is usual for you to not have large cash reserves. But, your advantage is that these products are sold more often and hence have a more reliable flow of income.
As short-term loans require payments on a frequent, regular basis, you can make great use of short-term loans.
If you do not have a big credit
Getting a long-term loan becomes very hard if you do not have a good credit score.
I have seen many people give up on their dream business just because they could not get a loan, but it is hard to have credit when your business has not fully flourished yet!
For people in such situations, short-term loans can be the perfect solution. This is because, as they are promising to pay back the money very soon, lenders are more likely to trust borrowers with small credit.
If you can show an earnings history
Short term loans depend on your future cash flow, and on the fact that you will earn enough money to pay back the loan in time.
As they do not require big credit, you will have to show them an earning history that will guarantee them your business was able to make that much of profit last year, hence you should be able to pay back the loan this year.
When should you NOT take short-term loans?
If you do not want the responsibility of making repayments yourself
To prove your genuine commitment to pay back the loan, the lender may ask you to make a personal guarantee.
This means, if your company fails to repay the debt, you will pay out of your own pocket. I suggest you consider all the odds before you sign on these conditions as it will risk your personal property too.
If you do not want to pay higher interests
One downside of short-term loans is that you will have to pay higher interest as you are not holding on to the money for a long time.
If you take a large loan for a short-term, the interest might be too high for you to pay back. Thoroughly consider this factor before making your decision!
If you did not make a cash cushion
Short term loans require regular payments, so make sure you have a cash cushion saved up! If something goes wrong and you are not able to make the estimated profit, your cash cushion will ensure that you do not fail your payment.
Otherwise, the higher interest might eventually become too high for you to cope with.
If you do not have reliable customers
Since you will be needing a reliable cash flow to take a short-term loan, it might be unwise to do so if your customers are not stable or reliable. If your business deals with people who pay up late, it is best to avoid short-term loans.
In my opinion, short-term loans are great options for businesses who do not want to take the burden of carrying a long loan. Either way, make sure you do your research before taking one!