Is your small business in need of a jump start? Sometimes launching or expanding your business requires more cash than you have on hand. If you only need a quick boost to your cash flow, short-term loans may be the right choice. Just make sure that you know what you’re getting into before you sign on the dotted line.
Short-Term Loan Options
When it comes to short-term loans, two of the your most common options are payday loans and car title loans. Payday loans are unsecured loans, which means there’s no form of collateral attached to the loan. You simply write a check to the lender for the amount you’re borrowing plus any fees and interest the lender charges, and the lender cashes the check after your next payday.
Car title loans are secured loans with your car as the collateral. You give the lender your car title when you get the car title loan, and then they return your title when you pay off your loan.
While each type of short-term loan is a bit different, they tend to fairly similar and share the same strengths and weaknesses. Here are the key benefits of these short-term loans:
• They’re fast and convenient, as you can typically get the money the same day that you apply for the loan.
• Most borrowers are approved and the application process requires very little in the way of financial records.
• There’s no credit check.
With that said, these types of loans also carry some serious disadvantages:
• Interest rates are usually very high, so you could end up paying 25 percent or in interest charges on a loan that you’ll only have for 2 weeks to 1 month.
• There will be additional charges if you can’t pay off your loan in time, which can leave you trapped in a cycle of debt.
Making a Small-Term Loan Work for Your Business
There’s really only one situation when you should take out a short-term loan for your business, and that’s when you need money immediately and you’re certain that you’ll be able to pay off the loan in full by the due date. Maybe you’re waiting on payment from a client but you need to make a payment yourself in the meantime, or perhaps you need the money to finish your expansion, and you know you’ll make it back with your new location’s grand opening.
You definitely pay a price for these short-term loans in the form of interest, but that can be worth it considering how quickly you can get much-needed financing. However, if you won’t be able to pay the loan back in time, it’s much smarter to consider alternative options, otherwise you’ll end up paying a large amount in extra charges.
Alternatives to Short-Term Loans
If you don’t think you’ll be able to pay back a short-term loan by its due date, there are other options available.
Of course, if you have a good-enough credit score, you can obtain a long-term loan through a bank, credit union, online lender or a peer-to-peer lending marketplace. These loans typically have terms of 1 year or more, but you’ll pay much less interest, and you can usually pay them off early.
Another solution is a credit card with a 0-percent APR introductory rate. The introductory time period varies depending on the credit card, but 12 months is a standard time frame. This will also require you to have a good credit score, but if you do, it’s a far superior option. You’ll have a revolving line of credit to use, and as long as you pay off the balance in time, you won’t pay any interest.
Finding the Right Financing Option
Choosing the right form of financing is crucial for your small business’s success. Short-term loans can be a solid option when you need quick cash, but if you have good credit, you may be better off looking at other options.