Small business owners often lack the financial resources needed to face emergency bills, crisis or just to grow their company. Adding a new product to your portfolio, buying new expensive equipment or hiring a new employee can be risky, but can also help you increase your revenues in the long term. Short term loans can represent a quick way to access a new capital that, if used responsibly, can make the difference if no other resources are available.

On the other hand though, even the smallest short-term debt represents a risk that should never be underestimated. Overextending may result in facing higher costs to borrow funds and getting stuck in an endless cycle of crushing debts that will slowly eat out your entire business’ cash flow.

Pros – Easier to qualify

Simply put, it’s easier to get a short term loan.  Requirements are usually much more relaxed, and even those who have a bad personal credit rating can still qualify.  Businesses who have been already shut out or are unqualified for conventional banks can still borrow some money to keep sustaining themselves in a pinch. Often a proof employment, some personal possessions (a car or a house) or a valid checking account are all you need to get cash in hand the same day you apply for a loan.

Pros – Quicker to obtain

Short terms loans can be secured in just a matter of hours or days instead of weeks or months like conventional lender loans.  The paperwork is usually extremely limited, and there’s no need to wait for a long time if you need the money right here and now.  Most of the time you just need a few months worth of bank statements, saving yourself a lot of time instead of wasting it waiting for financial documents. Whether you need to repair a machine or rapidly buy a new piece of equipment, a short-term loan can be a great solution to stay in business.

Pros – Payment plans with limited duration

Short-term loans can (and must) be paid back quickly, usually within 3 to 18 months. The lender is usually paid back on a daily or weekly instead of monthly schedule. If you’re able to get back the money you borrowed quickly enough, you can get rid of the debt in a very short time. The limited duration and set payment structure of these loans is especially beneficial since the debt will be quickly cleared off your book, often even before the fiscal year is over.

Cons – Strong cash-flow is required

Borrowers with damaged credit can access the capitals offered by short-term loans without providing much of the traditional financial information only if they possess a strong cash flow. However, this is a potential pitfall that can slowly suffocate your business if you’re not careful. If the cash flow is tight or if an emergency arises and prevents you from making the payment on that loan, there’s a significant risk of falling into a never-ending debt trap cycle.

Cons – Higher interest rates

Long-term loans almost always come with much lower interest rates than short-term ones, mostly because you have much more time to pay them back. Also, the interest rate on a short-term loan depends on many factors such as your personal credit rating or your annual revenue. This means that even if you were still eligible regardless of your bad credit status, you’re still going to pay premium for this additional benefit.

Cons – High cycles are risky

Weekly payments can be a serious threat if your revenues are sporadic or if your investment doesn’t pay back quickly. If cash flow is tight you may have to face additional penalties to the already high interest rate or, worse, being forced to make another loan to pay the first one. The infamous “debt trap” is a downward spiral that can quickly drain all your resources and force you to focus your efforts into paying back your debts instead of growing.

Cons – It can become a habit

Short-term loans are simple and convenient, it’s true. Every time you need money you can borrow it, provide a rapid answer to your immediate need and then pay it back within a few weeks or months. However, if this approach becomes an habit, you can end up spending a lot more money than you can really afford. Also, this can lead to a negative loop where you keep wasting money in interests instead of looking out for better long-term solutions that prevent future issues.

There are some key decisions to make before accepting what seem like agreeable terms. Cautiously understanding the limitations and benefits of a short-term loan is vital to avoid bankrupting yourself.

Small business owners often lack the financial resources needed to face emergency bills, crisis or just to grow their company. Adding a new product to your portfolio, buying new expensive equipment or hiring a new employee can be risky, but can also help you increase your revenues in the long term. Short term loans can represent a quick way to access a new capital that, if used responsibly, can make the difference if no other resources are available.

On the other hand though, even the smallest short-term debt represents a risk that should never be underestimated. Overextending may result in facing higher costs to borrow funds and getting stuck in an endless cycle of crushing debts that will slowly eat out your entire business’ cash flow.