Pros and Cons of Short Term Loans for Businesses

• March 16, 2017

For a very long time, businesses across the world have relied on the convenience of short term loans to overcome difficult financial situations. Although, despite their effectiveness, they are not ideal for every financial situation a business may be facing.

Hence, if you are running a business and you are considering a short term loan for any reason, you need to be well informed regarding when they should be sought out. You also need to know about their pros and cons so that you have a detailed understanding of what awaits on ether side of the fence. Discussed briefly below are some of the pros of short term loans:

Short term debt

By leveraging short term loans, a company may be able to rid themselves of bad debt over the long term. This is because the loans tend to mature faster and the borrowers don’t have to pay them back over a long period. Additionally, since such funding is only available to a limited amount of organizations that qualify for such financing, businesses must ensure that they are very responsible regarding spending.

Improved Credit

Short term loans can be used by a business with poor credit to quickly boost their credit scores. Since most of the short term loans are repaid within months, as a result of the loan, a business with bad credit will see an improvement in their credit score and once the score becomes better, the business will be able to opt for another loan at better rates.

Increased Growth Potential

Another obvious benefit of short term loans for most businesses, is being able to grow and expand the business at a much faster rate.

Short term loans also come with negative side effects and here are some of the drawbacks associated with these loans:

Higher interest rates

Most short term loans tend to have higher interest rates than their long term counterparts. This is because lenders prefer to avail them at prime interest rates in addition to adding a premium based on the degree of risk involved.

Increased spending by companies

Since short term loans are easily accessible, companies tend to increase their expenditure in part because they can always access the loan money. As a result, it is possible for a company that relies on short term loans to spend more money than they should.