There is always a time in life when many of us need some quick cash to meet our short-term needs. Whether it is to finance a car, renovate your house, or meet your child’s wedding expenses, you will always need money for one thing or another. With the constant increase in living costs, a short-term loan seems a viable option to fund your needs.
While banks and other financial institutions offer several types of loans, you should always go for the option that suits your needs. But with so many loan options available around, it can be challenging to know which loan options are the right for you.
To help you make a better decision, we have created this blog post which covers the nitty-gritty of some of the popular types of short-term loans that are available to you. It also the characteristics of short-term loans and what makes them different from medium- or long-term loans, which will hopefully make the process a lot easier for you.
What is a short-term loan?
A short-term loan is a borrowing that has a repayment period of about 6 to 12 months. These loans are generally availed by individuals or entrepreneurs to meet their immediate financial requirements. The borrowing amount is usually lesser than other forms of loans and carries a higher interest rate. Such loans are mostly unsecured due to the lower borrowing amount, which decreases the necessity to have collateral.
After getting some familiarity with the short-term loans, let’s try to get a closer look at the funding options and what each option can offer you:
1. Lines of Credit:
A business line of credit can solve the cash flow challenges that many small business owners face. Around 84 percent of small businesses say they fail to get all the funding they need. Among the many business financing solutions, the line of credit can ensure that you always have the cash to pay your vendors, employees, and utilities on time. You receive a credit limit that you can use as needed and then repay the spent amount gradually. You can use the money for things like office or storefront upgradation, marketing campaigns, or even paying off other debts.
Compared to other traditional loans, it is much easier to qualify for a business line of credit. By fulfilling the following two requirements, you can have higher chances of qualifying for a line of credit:
- You must have been in the business for at least six months
- Your annual revenue amounts to at least $50,000
If your business fulfills these requirements, your next step should be a compilation of the paperwork. Depending on how quickly you compile the paperwork, your business line of credit can take as less as one business day to several weeks.
Your credit limit can range from $10,000 to $1 million, depending on your needs and your business’ financial position. The interest rate for the line of credit can be anywhere from 7 percent to 25 percent. However, the good news is that you will pay the interest only on the funds that you withdraw, irrespective of your credit limit.
2. Merchant Cash Advances:
The merchant cash advance (MCA) is a cash advance per se, but it can fulfill the purpose of a loan. This facility is best suited for businesses or individuals with massive credit/debit card sales instead of cash sales. Under this facility, the lender loans a lump sum amount to the borrower. The borrower repays the loan by allowing the lender to access his or her credit facility. Each time the borrower makes a purchase, a certain percentage of the sale goes to the lender. This happens every day you have a credit card transaction until the MCA is entirely paid off.
MCA funds small businesses with loan amounts ranging from $2,500 to $250,000. The factor rate for the loan amount can be anywhere from 1.14 to 1.18. There are no repayment terms usually, but the daily payments ensure that the advance will be quickly paid off.
To qualify for a Merchant Cash Advance, you will have to fulfill the following requirements:
- You must have been in the business for at least 1 year
- Your annual revenue must be at least $50,000
- Your personal credit score should be more than 500
You can check your credit score at places like Equifax, myFico, or Experian. Below you can see what usually goes into your credit score calculation.
It is necessary to check your credit report for any erroneous information because the approval of your application depends on it. Besides the credit score, try to opt for a financier who is in close vicinity to your business. If your business is based in Indianapolis, it is only natural that a credit union in Indianapolis will show more interest in becoming your financial partner than credit unions located elsewhere.
3. Payday Loans:
A payday loan is an emergency short-term loan facility that is relatively easy to obtain. It suits individuals or small entrepreneurs who need quick cash to fund immediate liquidity requirements. The loan amount under this facility is determined based on the borrower’s earnings. Most of the times, it is a specific percentage of the borrower’s earning. The drawback of the payday loans is that the entire amount, along with interest, shall be paid in one lump sum when the payday arrives i.e., upon the receipt of the next income.
4. Bridge Loans:
Bridge loans, also known as swing loans or gap loans, are temporary alternatives to fund your immediate financial needs. These loans are usually short-term in nature, which are aimed to reduce the gap between your current financial needs and potential long-term financing. Bridge loans are mostly used by real estate investors who are looking to arrange down payments for their property. The loan can be repaid as soon as the market turns conducive to raising capital. This makes swing loans an ideal short-term loan, although the interest rate on these loans can be higher than on other types of loans.
These are some of the popular loans that can be availed to finance the short-term needs of the borrowers. It is vital to evaluate your financial situation and choose the method that best suits your conditions. It is equally important to thoroughly consider the terms and conditions of the loans so that you can use the loan facility without any hiccups.
Evie harrison is a blogger by choice. She loves to discover the world around her. She likes to share her discoveries, experiences and express herself through her blogs. Find her on Twitter:@iamevieharrison