Short-Term Financing 101: Pros, Cons, and Everything in Between
Short-term financing can be very helpful for keeping your business afloat through difficult times. However, it can also ruin you when used incorrectly. This type of financing fits a specific range of circ*mstances. You need to understand when to use it and how to choose the best online lenders that can meet your business’ needs.
Short-Term Financing: Pros & Cons
Advantages of Using Online Lenders for Startups
The most important benefit of online short-term loans is that they are much easier to get. Compared to banks, the approval process is straightforward and fast. Moreover, eligibility requirements for this financing are also rather minimal. In fact, many online lenders offer unsecured loans. Some of them will even work with clients that have bad credit. This will be most important for many businesses that are trying to get financing in the current crisis.
In terms of time, online loans are good because they can provide you with funds within 24 hours. The terms for this will vary depending on the situation. However, if you are in a pinch, this is the type of financing that will give you money fast. Bank loans, on the other hand, can take over a week to get approved.
The availability of short-term loans is another very important benefit. There is a great number of online loan providers today and their products are extremely versatile. Therefore, every business can find some type of loan that will meet their requirements. This includes unsecured loans and loans for bad-credit clients.
The versatility of options is complemented by the flexibility of short-term financing. This means that not only are there many types of loans for you to choose from. You can also find offers with highly flexible repayment terms. There are options with weekly or monthly payments and those that allow you to pay off the debt early.
Note that early repayment is an important requirement for a short-term loan. The purpose of this financing method is to offer a “quick fix” to tide your business over until the next payment comes in. Therefore, having the ability to pay the loan off early will help you save money on interest.
Disadvantages of Short-Term Financing
The main disadvantage of this financing type is that it’s very high-risk. Therefore, online lenders have no choice but to mitigate the risk in every way they can. The main solution they use is to set high interest rates.
It’s very important to be very careful when you are choosing a short-term loan and read the terms thoroughly. You can use a loan calculator to check exactly how much money the loan will cost you. Note that these loans can range from 5-15% to 200%. This means that if you aren’t careful, you might get into a contract where you’ll have to pay double the amount of the original loan. This is the kind of deal that can break any business.
The interest rate will get higher as the loan gets riskier. Therefore, short-term financing without security or for businesses with bad credit will always be the most expensive.
Moreover, remember to check the repayment terms. In some cases, it might make sense to take out even a very expensive loan. However, you should only do this if you can pay it out fast.
Another disadvantage of this financing is that online lenders aren’t as well-regulated as banks. In fact, this industry is full of frauds and their number has grown with this last crisis. Therefore, you should always run a thorough background check of the lender before taking a loan. This includes checking the lender’s credentials and contact details. Any respectable legit company will have at least one office you can contact directly.
Next, study online lender reviews and look up news about the companies. Check both professional and customer reviews to get a well-rounded picture of the lender.
Top Online Lenders in the USA in 2021
There are many online lenders in the US. But if you want to be safe and get the best terms, you should go for the leaders in the market. This means your choice will boil down to comparing Kabbage vs OnDeck. Both these companies are the leaders of the industry but their product offering is quite different. However, between the two of them, these companies cover all short-term financing options an entrepreneur might need.
Kabbage is the smaller company more oriented toward really short loans. The maximum loan term it offers is 6-18 months and the maximum amount is $250,000. Note that this lender is very innovative and also offering unsecured credit options. Kabbage is also one of the first online lenders to work within the SBA’s Paycheck Protection Program. But it must be noted that at the moment it offers only PPP loans. Hopefully, with the company’s purchase by American Express, the situation will change.
OnDeck can offer loans of up to half a million and 36 months long. However, getting a loan from this online lender will be harder as it must be secured and the eligibility requirements are more stringent. The company offers PPP loans but it also offers original loans. This is due to the fact that it was recently bought by Enova.
When to Use and When to Avoid Short-Term Financing
There are quite a few ways to finance your business and using a short-term loan should not be your first choice. In fact, this is one of the options you should keep as a “last resort” only. This is because these loans are expensive no matter the circ*mstances. Therefore, the first thing you need to do when you consider this financing option is to make sure it won’t drag you under.
This means that you need to be confident in your ability to pay off the loan quick. That’s why it’s called short-term financing. It should only be used in situations when you are stranded without cash for a limited period of time. However, having cash during this time is important enough to incur some loss with an expensive loan.
Situations when taking a short-term loan from online lenders is a good decision include:
- Resolving immediate cash flow issues.
- For example, if you are without the money to pay essential bills but expecting a payment within a few weeks. The primary purpose of these loans is to help with such immediate situations.
- Making payments before you get approved for a bank loan.
- If you have a chance at a better long-term financing option but you need the money fast, this loan can fill the gap. For instance, you can use it to make some emergency payments while the approval of a cheaper bank loan is pending.
- Giving your business a seasonal boost.
- It will be a good idea to use short-term financing in preparation for the holidays or some other important period for your business. But remember to take this loan only if you are confident that your revenue will be enough to pay off the debt fast.
You also need to understand that there are situations when you should avoid using a short-term loan. If your business is in a bad position with no resolution in sight, you shouldn’t take the risk. In addition, remember that you shouldn’t try to replace a long-term loan with this one. This should only be a temporary solution.
In Conclusion: Should You Get Short-Term Financing for Your Startup?
The world has changed with the pandemic and any business that wants to survive in it must follow the relevant trends. You might need money to adjust your business to work better with the changed consumer behavior. You might also need financing just to get some cash flow into the business to tide you over between payments. No matter your reasons, using the services of online lenders will be the best choice in many situations. These loans are quick and relatively easy to get. However, remember that short-term financing is also risky. You need to be sure that you can settle this debt fast before you actually take the money.
