Advantages & Disadvantages: Short-Term Biz Loans » BizFly Funding (2024)

Small businesses, however, often have far less wiggle room in their accounting or bank balances than larger corporations, and are therefore much more reliant on funding.

Likewise, knowing how to secure that funding, and put it to the best use, can make a huge difference in whether or not a small business sinks or swims.

To that end, it’s important for small business owners to understand the advantages and disadvantages of the different kinds of small business funding choices that are available. In this guide, we’ll take a closer look at short-term business loans.

We’ll discuss what they are and how they work, where they differ from more traditional (longer-term) small business loans, then explore their advantages and disadvantages in detail.

Short-term business loans are a type of business loan that provide cash as a lump sum, and then require repayment over a set period of time, with interest.

These may be available in secured (collateral-required), or unsecured (no collateral required) forms, depending on the lender and qualifications of the borrower.

Short-term business fundingin general is primarily used for short-term expenses and needs, with other financing products being a better option for either ongoing/revolving expenses, or for more long-term expenses.

There are tradeoffs withshort-term business loans, as with all kinds of small business funding, as we’ll explore in more detail below.

Principally, short-term business loans are different from unqualified or traditional business loans in a way that is made clear in their name: they have a shorter term.

In practice, this means that short-term business loans (and most kinds of short-term business funding) are designed to be repaid over a much shorter period of time (the loan term) than other kinds of loans or credit products.

n the case ofshort-term business loans, this is usually a matter of months to a year or two at most, whereas longer-term loans may last for several years to a decade or more.

This difference plays a role in some of the advantages and disadvantages ofshort-term small business loansthat we’ll discuss in a moment.Short-term business loans may be secured or unsecured, just like other kinds of loans.

Additionally, in most cases, there are no restrictions or commitments on how the funds from a short-term small business loan may be used by the business, which is the same with longer-term loans.

However, when it comes to qualifications and the amounts available from a short-term business loan, they do tend to differ from longer-term loans, with both more stringent requirements to qualify, and a lower overall lending threshold.

This is because short-term loans represent a larger risk for the short-term business lending companies, as the faster repayment cadence increases the risk of borrowers defaulting or being unable to repay the loan.

• Lower Cost

Short-term business loans can provide much-needed funds for small businesses at a lower net cost than many other options. While the stated short-term business loan interest rates can be higher than the rates for longer-term loans, that doesn’t tell the whole story.

Usually, interest rates are stated on an APR (annual percentage rate) basis. For a loan that lasts less than a year, the cost of borrowing won’t be as much as the annual interest rate would make it appear.

A loan offering a 20% APR but lasting for only 6 months would, in effect, have a real APR of 10%. Because short-term small business loans are repaid more quickly than longer-term loans, and lenders get their funds back quicker, they can often cost businesses less than longer-term loan options.

• Best Suited for Short-Term Expenses

The increased speed of repayment and shorter term of a short-term business loan means that they are best suited for short-term expenses. One of the principles of small business funding is to match the appropriate kind of funding with the appropriate kind of expenses.

This means that short-term business funding is ideally utilized for things like purchase order financing, temporary increases in staff or labor, and short-term operational expenses that will provide a return within the term of the loan.

They’re really the best choice for that kind of expense, with other small business financing options being more well-suited to revolving or longer-term expenses.

• Smaller Repayment Installments

Though repayments are more frequent with a short-term small business loan than with its longer-term counterparts, the repayment installments themselves are generally much smaller.

For businesses that operate with a high cash flow on a day-to-day basis, this can make it much easier to manage the repayment of a short-term business loan than some of the other kinds of loans that are available.

• Not Suitable for Longer-Term Expenses

As discussed in the advantages section above, short-term business loans are best for short-term expenses. The corresponding disadvantage to this is that they are not suitable, and can end up costing you more, if you attempt to use them for longer-term expenses.

They also make it easier to get into financial trouble in this case, as using them for things that won’t provide a financial return within the short period of time in which the loan must be repaid can make it incredibly difficult to make the repayments without creating additional debt obligations.

• Fast Repayment Cadence

Short-term small business loans typically have a much faster repayment cadence than longer-term loans. Typically a longer-term small business loan will require a monthly repayment of principal and interest. With short-term business loans, that period is often weekly, or even daily.

While the payments are smaller, and that’s definitely an advantage, the frequency can be a disadvantage, depending on the cash flow, income, and expenses situation at your particular small business.

• Harder to Qualify than Longer-Term Loans

Because of the faster repayment cadence, short-term business loans are considered a higher risk product by many lenders.

Short-term business lending therefore typically comes with qualification or eligibility criteria that may be harder to meet than that offered by those same lenders for longer-term loans and credit products.

A higher credit score, longer period of time in business, and greater monthly revenue are among some of the most common differences in the qualification requirements for a short-term small business loan compared to a longer-term loan.

If you own or operate a small business that is in need of short-term business funding, then consider applying for a short-term small business loan at BizFly Funding.

BizFly Funding deals exclusively in small business funding, offering a full portfolio of small business financing options that includes short-term small business loans.

With outstanding service, easily met qualification requirements, and generous loan amounts available, BizFly Funding should be your go-to source for all of your small business funding needs.

To learn more, get pre-qualified, and start the application process, visit BizFly Funding online at https://bizflyfunding.com.