Businesses are often in need of financing for a variety of reasons. For the construction or acquisition of an office building or facility, for example, or a general business loan that is used for the expansion of the business. Beyond these stated long-term loans, businesses often use a variety of different loan types for their short-term borrowing needs. This article will focus on the different types of short-term loans that are available and why certain businesses find it beneficial to use one form of a short-term loan over another type.
The most common short term loan that businesses use is a credit card. Credit cards allow businesses to borrow for the purpose of making a quick purchase, and are repaid on a monthly basis. Credit cards are convenient ways to make payments for purchases but given their high rate of interest are not a beneficial loan type for businesses that need to carry a balance, even if the loan is short-term in nature.
For larger short term loans, a revolving line of credit is commonly entered into. A line of credit is a loan type in which a borrower can borrow money against a line of money that is set aside for their usage. While there is often a maximum amount on this line of credit that is set, some lenders allow businesses with the ability to borrow more during certain seasonal parts of the year during which a company may need to borrow more to build up inventory levels in anticipation of consumer demand. Companies borrowing under a line of credit pay interest only on the portion of the line that they are borrowing on, but are generally charged a facility fee for banks having to set aside money in reserve for them which is a lost opportunity charge for a lender. A line of credit is a beneficial borrowing mechanisms for companies that are in need of financing, generally seasonally, but have strong financials and cash flows so that they can regularly repay balances. One of the negatives that is attached to lines of credits is the debt covenants that are attached to them that borrowers have to adhere to so that they don’t trigger early repayment.
Finally, some businesses develop term loans that are short term in duration and are repaid as they become due. Term loans are effective instruments and often have the lowest rate of interest assigned to them when compared to similar lending types, but are for one time borrowing only and do not meet the needs of all lenders.
Finding the right short term loan for your business can be challenging but look into what you are looking for the money for and whether the borrowings will be a one time borrowing or regular in nature, and also determine how large of a loan that you need and your capacity for being able to repay it before entering into a loan. Talk to your lender and explain what you are trying to accomplish and listen to their recommendations as well.