Short-term SME loans have maturity of one year or less, making it a short-term commitment for businesses. The availability of short-term debt financing allows SMEs to obtain faster approval compared to traditional lending where the process can be long with tedious documentation, delaying the required funds.
To operate smoothly, SMEs often require short-term startup loans from debt providers instead of long-term debt financing. Loans with tenure ranging from 3 months to 12 months provides SMEs the flexibility to get in and out of financing quickly without tying up their credit limit. Short-term business loans are also potentially more cost-effective despite having a higher interest rate due to the shorter repayment schedule where less interest is incurred by the business.
A survey by Electronic Transactions Association claims that more than half of business owners would choose a loan with shorter tenure to minimize total fees and expenses when facing a short-term ROI opportunity. Besides, short-term SME loans can act as a cushion when your business experience fluctuations in revenue or when an emergency occurs. This prevents startups from facing financial distress, especially when COVID-19 disrupted the operations of many businesses.
Short-term loans can be utilized in many ways, with the following being the common reasons startups seek for short-term debt funding:
1. To Raise Working Capital
Working capital is the heart of a business. It ensures the business can function day-to-day. A short-term SME loan covers temporary deficiencies in funds. This includes expenses such as payroll, marketing fees and payments on short-term debt. To fuel business growth, investment in expenses that drive growth such as advertising and marketing are essential. Loans can help cover expenses and provide a buffer, allowing the business to serve customers without compensating for growth.
2. To Bridge a Financing Gap
Bridge loans are short-term loans provided to startups until they secure a permanent financing. The process of equity fundraising via venture capital and high net-worth individuals, or angel investors is often long and complicated. This often leads to delay and affects the cash flow of startups in need of capital injection. With a short-term bridge loan, the startup can continue its daily operations and meet its short-term obligations while waiting to receive money raised from equity financing.
3. To Pay for Inventory
Some businesses require large amount of funds upfront to pay its suppliers to produce goods, but end customers usually have lengthy payment terms for the product. Businesses often face cash flow problems when they must raise substantial funds within the company to procure the product for sale. Payment terms can range from 30 days to 120 days, making the need for a purchase order financing from debt providers. These loans are usually provided to businesses by a single disbursement followed by a bullet repayment upon the maturity date when the business receives money from customers, making it a quick and hassle-free process.
4. To Improve Terms on a Larger Loan
Credit history plays a crucial role in a lender’s decision-making process when SMEs seek for financing. Lenders are more comfortable to provide financing to startups with good repayment history. Good credit conduct increases their confidence in the startup’s ability to repay. Businesses without credit history also tend to obtain loans with less ideal terms. Often, they secure loans with high interest rates and processing fees that will affect the company’s profitability. When startups establish a good relationship with lenders and repay their loans promptly, better terms are offered by their lender. This is especially useful when they require loans with larger quantum in the future.
Usually, short-term loans have zero collateral if your business has a great credit score. It is also coupled with speedy approvals and flexible repayment terms based on the needs of your business. You can also read up on how to increase your chances of obtaining a loan here.