Business Loan

Here’s when and why you should opt for a short-term business loan


Having a business is one of the best ways to have financial security. But it is a huge problem for young entrepreneurs to start their business venture with financial backup. Especially with increasing competition, it isn’t easy to have your own feet on the ground without business finance. A business loan can help you have the financial leverage you need to grow your business venture. With the rapid increase of startups worldwide, business finance has also been less strict. 

However, when choosing the right options for your business venture, people need clarification on whether to opt for a long-term or a short-term business loan. Both these loans have different characteristics, but for better options and more features, entrepreneurs have chosen the short-term business loan option over the long-term option. 

But when and why should one opt for a short-term business loan, and is it a good business financing option? Let’s find the answer in the following article. 

What is a short-term business loan, and what are its types?

As depicted in the name itself, a short-term business loan is a monetary aid to finance your business for a short duration. This is a convenient option for businesses either ineligible for a long-term business loan or needing more financial muscle to tackle long-term loans. These loans have a short tenure of repayment and are to be repaid within a year mostly. These loans have many characteristic features and function differently from that long-term business financing options. 

Short-term business loans are unsecured, so you don’t have to pledge your assets to get a loan amount. 

What are the types of short-term business loans? 

There are three types of short-term business loans – Trade Credit, Bank Overdraft, and Demand loans. 

  1. Trade Credit:

This type of short-term loan option is similar to that of a credit card. Like a credit card, here you also have a credit limit, and you are expected to use the amount, keeping your focus on the maximum limit. The repayment is also made in the same way as that of a credit card. The amount you use in a month is added to the interest rate of your spending, and the total amount is paid through an EMI.

  1. Bank Overdraft:

To avail of this business financing option, you have to have a current account which is additionally provided with the current account. Every current account has an overdraft limit within which you can draw the desired amount. This loan option is beneficial for those who faced financial tumult as the interest rates are not very high. However, there are some additional charges that you must discuss with your lender before going for an overdraft option. 

  1. Demand Loans:

Demand loans have comparatively shorter loan tenures out of all the business financing options. The loan tenure can be as low as seven days and up to a few months. Demand loans are designed only to cover the monetary needs of businesses. One huge advantage is that the borrower can repay the loan amount anytime. There is no prepayment penalty on repaying the loan before the specified term. 

When and why should you be going for a short-term business loan? 

There are multiple scenarios when you should go for a short-term business loan. Suppose you have an immediate financial crunch and require finance to expand your business, cover operational costs, meet monthly capital requirements, etc. In that case, you need to have a short-term business loan. Besides that, a short-term loan can help you bridge the cash-flow gaps many times. 

Discussing the reasons for which a short-term business loan is preferable,

  1. Faster Processing:

The processing is relatively faster as a short-term business financing option has a relatively small portion of the loan amount to cover emergency needs. All your immediate costs can be efficiently covered through a short-term business loan to keep up the pace.

  1. Flexibility:

When it comes to flexibility, a short-term business financing option provides much more flexibility as compared to that a long-term business loan. There are no restrictions on using the loan amount, as the banks don’t dictate your spending. You can use the loan amount for various purposes like raw materials, hiring employees, marketing, etc.

  1. Repaying the amount you use:

Unlike other business financing options, these loans are subject to Flexi options, which enable you to pay only for the amount you use instead of paying the interest for the entire loan. This is a huge advantage as the interest rate is calculated based on the amount you borrowed and your chosen loan tenure.

  1. Easy application process:

Short-term business loans are easy to apply for and significantly take less time than her forms of loans. Financing institutions focus on increasing the convenience of the borrowers by saving their time through minimal documentation and lesser paperwork. 

The Bottom Line

Several business financing options exist, but a short-term loan can help you fulfil your emergency cash needs and bridge the cash-flow gaps. If you ever had a sudden monetary crunch and urgently need some cash, then a short-term business loan is your way to go. You are not dictated by how you utilise the loan amount in your business, and the financing institutions disburse the amount within a day. Your interest rate and the EMI amount are decided by the type of loan you choose. The interest rate varies between 3% to 150% depending on the type of loan you prefer. 

If you have come this far and are eager to know about short-term business loans, long-term business loans, personal loans, car loans, home loans, etc., you can visit Piramal Finance.