What is a Short Term Loan?
A short-term loan is a form of loan taken out to meet a brief demand for funds on the part of the borrower or their business. Given that it is a form of credit, it entails paying back the principal plus interest by a specified due date, which is often one year after receiving the loan.
For small enterprises or start-ups that aren’t yet qualified for a bank credit line, a short-term loan is a useful choice. Smaller borrowing amounts—from $100 to $100,000—are involved in the loan. Short-term loans are appropriate for both individuals and organizations who have a brief, unexpected cash flow problem.
Characteristics of Short Term Loans
Short-term loans get their name from how quickly they must be repaid. It often needs to be repaid within six months to a year, and no more than 18 months. Any loan with a period longer than that is referred to as a medium- or long-term loan.
Just over a year to 25 years are the range of long-term loan terms. Some short-term loans have no set due date or payment plan. Simply put, they permit the borrower to repay the debt at their own pace.
Short-Term Loan Types
There are several types of short-term loans, as follows:
1. Merchant cash advances
This kind of short-term loan functions like a cash advance even though it is essentially a loan. Lenders provide loans in the amounts requested by borrowers. By granting the lender access to the borrower’s credit facility, the borrower makes loan installments. Until the loan is repaid, the lender retains a predetermined portion of the proceeds from each purchase made by a borrowing client.
2. Lines of credit
Using a line of credit is comparable to using a company credit card. The line of credit has a predetermined credit limit and can be drawn upon by the company as needed. It pays back the sum that was borrowed in installments every month.
The amount of the line of credit that has been obtained determines the monthly payments that are due. Lines of credit have one advantage over business credit cards: the former frequently have lower Annual Percentage Rates (APRs).
3. Payday loans
Payday loans are short-term, emergency loans that are relatively simple to get. High street lenders also provide them. The disadvantage is that when the borrower’s payday comes around, the entire loan amount, plus interest, must be paid in full.
Repayments are normally made by the lender using the continuous payment authority to withdraw the appropriate amount from the borrower’s bank account. Typically, payday loans have quite high interest rates.
4. Online or Installment loans
Additionally, obtaining a short-term loan is rather simple when everything is done online, from application to approval. The funds are wired to the borrower’s bank account shortly after the loan is approved.
5. Finance for invoices
Accounts receivable, or invoices that customers have not yet paid, are used in this sort of borrowing. Based on the number of weeks that invoices are past due, the lender lends the money and assesses interest. When an invoice is paid, the lender will stop paying the invoice and deduct the interest from the loan before giving the borrower the money that is owed to the company.
Advantages of Short Term Loans
Taking out a loan for a brief time period has various benefits for the borrower, including the following:
1. Shorter time for incurring interest
Short-term loans have lower total interest payments because they must be repaid in less than a year. The amount of interest paid is substantially lower than with long-term loans.
2. Quick funding time
The shorter maturity period of these loans makes them less hazardous than long-term loans. The likelihood that a borrower won’t be able to repay a debt in a timely manner decreases. As a result, it takes less time for a lender to process the loan. As a result, the borrower can get the money more rapidly.
3. Easier to acquire
3. simpler to obtain
Smaller firms and individuals with poor credit scores can only survive thanks to short-term loans. Due in part to the fact that these loans are typically for smaller sums of money as compared to the sums of money that are typically borrowed on a long-term basis, the requirements for such loans are typically simpler to meet.
Short-term loans’ primary drawback is that they only offer modest loan amounts. Small amounts are typically involved in the loans since they are repaid or paid off earlier, which spares the borrower from having to make hefty monthly payments.
Short-term loans can be highly helpful for both individuals and organizations. They could be a smart solution for firms to deal with unforeseen cash flow problems. Such loans might be a good source of emergency cash for people.