If you’re just starting your business, you might be hearing about short-term commercial loans every once in a while. And you might not know what it means, because why should you? Navigating through the business world is hard, after all. Especially something as tricky as loans.
But fret not, my friend. Because with our guide regarding everything you need to know about short-term commercial loans, you’ll be finding yourself understanding the topic in no time at all.
What is a short-term commercial loan
Short-term commercial loans are a type of financing for your small business where the money that you borrowed have to be paid back in full over a handful of months. Most short-term commercial loans are typically available for three to 12 months, but some lenders may offer you one that is repayable in just one month or so.
But if were to go into even more detail, short-term commercial loan is typically used to fund major capital expenditures or operational costs that your business may be unable to afford. Expensive upfronts costs and regulatory hurdles often prevent small, new businesses from having direct access to bond and equity markets for financing.
Resulting in smaller business needing to rely on other lending products such as lines of credit, term loans, or unsecured loans.
Another thing worth of note is that while short term commercial loans are mostly indeed, short in terms, they can still be rolled or renewed to extend its lifespan.
How short-term commercial loan works
These types of loans are granted to a variety of business entities to assist with their short-term funding needs for operational costs or purchase of equipment to facilitate their business. There are also some instances where the loan may get extended to help said business meet more basic operational needs like funding for payroll or to purchase supplies used in the production and manufacturing process.
Keep in mind that these loans require that a business posts collateral. Usually in the form of property, plant, or other equipment that the bank or lender can confiscate in the events of default or bankruptcy.
In some cases, borrowers can use cash flows generated from future accounts receivable as the loan’s collateral.
What can a short-term commercial loan be used for?
As with most business borrowings, shot-term commercial loans can be used for anything. But that doesn’t necessarily mean that they’re the best type of financing option for your business investment needs.
Short-term commercial loans work best if they’re seen as a short-term cash injection to help overcome sudden cash flow problems or to help you take advantage over unexpected investment opportunities.
The advantages of short-term commercial loan
The biggest advantage of short-term commercial loan is that it can be used as a way to get cash into your business fairly quickly for use the likes of paying for unexpected cost, or getting through times when your cash flows are inconsistent.
The speed associated with short-term finance is also one of its main advantages. Getting a commercial loan means you can access the fund within days. They can even involve instant approval in some cases if you meet their criteria.
But before doing so, make sure to evaluate your options first as the interest for those types of loan can be very high and worrisome.
The disadvantages of short-term commercial loan
Small business loans usually require higher monthly repayments when you borrow the money over a shorter period. And while you may pay less interest overall since there are fewer payments, each payment is still likely to be higher than usual. So, make sure you can make these payments before considering getting this type of loan for your business.
It’s also one of the reasons why they have a higher interest rate in general. Because it means that even if you go into default or bankruptcy, those lenders can still make profit from the loans they’re giving you. It serves as a guarantee for your bank or lender, in short.
What to consider when comparing short-term commercial loans
A number of price comparison sites will list the APR offered by varying lenders, along with the maximum and minimum of amount you can borrow, as well as the loan terms available for them. It might seem straightforward at first, but these can often be a crude and inaccurate way to calculate how much a loan will cost you for your business.
There’re often hidden charges for arranging a loan, and even stringent charges for early repayments or missed payments.
The way it is right now, creditworthiness of an applicant plays a big role when a financial institution decides to give out a commercial loan. In most cases, the business applying will be required to present documentation involving balance sheets or other similar documents to prove that the company has a favorable and consistent cash flow.
If a company is approved for that commercial loan, then it can expect to pay a rate of interest that falls in line with the lending rate at the time the loan is issued.
Banks typically will require monthly financial statements from the company through the duration of the loan and often require the company to take out insurance on larger items purchased with the funds from the loan
And with that ends our guide on everything you need to know about short-term commercial loans. It’s a tricky water to navigate, so we hope this guide of ours can help clear out any questions you may have in your mind about getting a commercial loan for your business.
That is all from us for now. Thank you for reading this article, and we hope to see you again some other time with another article involving loans, cash loans, and financial IQ advices in general.
Oh, if you have any questions about this topic we’re talking about in this article, definitely let us know in the comments. We’ll help you to the best of our ability to answer. See you!