A short term loan is money that is lent to a borrower, who must repay it back to the creditor within a specified period. The maturity of the short term loans is usually less than one year. Institutions that offer short term loans for small businesses are vast, this includes banks, micro lending companies and
Government supported microfinance projects. Many small business owners have to take loans at some stage for a variety of reasons and demand for the loans is increasing as the following Huffington Post article in America illustrates. While getting a short term loan is not the only way of financing a small company, there are a number of reasons why taking a short term loan will be an advantage to the operation of small businesses.
1. The primary goal of starting a company is to make a profit. So the small scale companies have to be geared fully for the challenges that await them. The biggest obstacle in starting a small scale company is limited finance. This is because it takes a lot of resources for one to start operating and at the same time trying to compete with established competitors. Even if a business has a good business plan without the necessary money it will struggle in the market that is why it could be an advantage to take a short term loan. Small companies that have their model based on high volume sales can enjoy the advantage of getting a loan. If the goods or services are in demand it means that the small business will not have problems repaying the loan. The big advantage will be that the company is not directly using its own resources that can strain its operation, yet as the same time it is growing. This will make it capable of repaying the short term loans.
2. When a small business applies for a loan the approval is not automatic. There is screening and only the good applications are approved. Due to the fear for failure most of the banks and other credit institutions actually make sure that they provide the borrower will a financial advisor who can assist in evaluating the business plan of the company. Taking a small scale loan could ensure that your business plan is polished for no costs at all. One can also incorporate new ideas that might be suggested by the financial advisor. So by taking a short term loan at a financial institution it provides the small business with checks and balances of its business plan.
3. Most financial institutions are convenient and accessible for a small business to go and apply for a short term loan. There are a number of loans available with different interest rates and payment plans that could suit many different companies. This gives the small business a wide selection of where to apply the short term loan. In most cases processing of these loans are fast especially if the small business is not a first time user of the institution.
4. If the owner of the small business would want to retain the full ownership of the business then this is the only way one can have full rights. By taking a loan the ownership of the business does not change. This is better than attracting a venture capitalist who agrees to provide a loan in exchange for part ownership and the right to influence decision making.
5. In an endeavour to create employment small business can actually benefit from Government. Interest rates can be reduced especially for the small businesses to borrow. It then becomes a cheaper way of financing the business. Some governments can actually allow business the opportunity of tax benefits on the profit that is used to pay back the loan.
6. A short term loan needs to be paid back within a year on average. This is an advantage to the business because this debt will not be a burden to the business in a long time. It is not ideal that small companies are laden with a big debt that can affect the business in the long run.
7. If a small company is confronted with a need for emergency funding or needs a replacement in a limited time then the short term loan can be a great advantage .This is because the owner has the ability of quickly applying for a loan especially if the business is facing a crisis.
As has been mentioned there are a number of benefits of taking a short term loan, however there is also a need for prudence when it comes to the selection of the financial institutions to borrow from. There are a lot of financial institutional that offer different short term loans. The trick would be in choosing a financial institution that has a repayment plan and reasonable interest rates that the small business is able to repay comfortably. If this is done small businesses will enjoy the full benefits of a short term loan.