Short-term Business Loans
Short-term business loans provide emergency cash support to a business organization. It can help to grab a quick business opportunity.
Finance is the lifeblood of any business organization. Therefore, the intervening gap between investment and returns must be supported by borrowed finance, primarily in the form of loans. Loans are both long-term and short-term.
Purpose of Short-term Business Loans
Short-term business loans are usually required to meet the urgent, temporary financial needs of the business. There may be a sudden business opportunity, such as a new bulk order that needs to be executed in a short period, and the buyer’s payment would be realized later. In such situations, material procurement and production costs can be supported by acquiring a business loan. The loan can be paid back as soon as the order is executed, and the buyer’s payment received.
Loans may be necessitated in emergencies such as a temporary cash crunch in the business, or delay in a scheduled payment from a buyer. In such conditions, a loan can help to support the working capital of the company till the time the regular cash flow of the business is restored to normalcy.
Types of Short-term Business Loans
Short-term loans can be acquired through various sources and have different forms. Even a bank overdraft facility is a loan facility that the bank grants to its trusted business clients. Trade Credit is another form of loan that is a B2B facility available in the business. Under trade credit, goods or material may be procured without paying for it for a certain number of days. Payment can be made once the goods are sold further, and cash is generated from the sales. Bank loans and loans from private lenders are also available for the short-term.
Flexibility and Efficient Resource Utilization
The critical advantage of short-term loan facilities is that they allow the business to operate with sufficient freedom and flexibility. At the same time, the company can employ its total cash resources for optimal returns when there is a back-up of finance available to it. So the business can operate on thin cash reserves, and avail of loans whenever necessary.
The downside of Short-term Loans
External investors and financiers of the business may not approve the idea of operating on meagre internal cash reserves and rely on borrowings frequently. It may affect the credit ratings of the company adversely over some time.
Secondly, short-term business loans are usually available at a higher rate of interest. It is costly money that may put pressure on the business if it is operating on very slim profit margins.
However, the objective of the business organization must be to maintain an approach of financial prudence, and use business loans only when it is unavoidable or profitable to do so under the circumstances.