Short-Term Business Loans

Short-term business loans can be a good way to raise working capital and cover accounts payable. Is your company in the right position to take advantage of this type of financing?

Most businesses experience slow times now and then. In the retail industry, seasonal products must be ordered -- and paid for -- months before they will be sold. A short-term business loan can help even out cash flow when your accounts payable schedule is shorter than your sales cycle. Learn more about Accounts Receiveable Financing for Your Business. Short-term business loans can be a good way to raise working capital and cover accounts payable.

Short-term loans can have maturations of as little as 90-120 days or as long as one to three years, depending on the purpose of the loan. In general, banks require very specific repayment plans for their short-term loans. For instance, if you took out a loan to even out your cash flow until your customers paid you, the lender would expect you to repay the loan as soon as you receive your money. In the case of short-term loans for inventory purposes, you would pay off your debt when you sell your inventory.

Short-term loans are appropriate for both new and existing businesses. When dealing with new businesses, some banks will grant only shorter-term loans, because short-term loans are less risky than loans with longer terms.

Before a lender will grant a short-term loan, it will review your cash-flow history and payment track record. Most short-term loans are unsecured, meaning they do not require collateral. Rather, the bank relies on your personal credit history and credit score for approval.

Secured loans require collateral such as property, equipment, or accounts receivables. If you have substantial assets and are comfortable using them to secure a loan, you may get more favorable terms and interest rate. Should You Personally Guarantee a Loan to Your Small Business? Short-term loans tend to have higher interest rates overall, but the rates usually are fixed so your rate will not rise. In addition, since the loan is repaid quickly, you pay less interest than you would on a long-term loan.

Occasionally people confuse short-term loans with business lines of credit, where you can pay off a balance and borrow funds as you need them. But a short-term loan gives you a fixed amount of money in a lump sum, and once you have paid it back, you cannot borrow more.

Get more information on other business funding and loan options for launching your new venture at AllBusiness.com.

Copyright © 1999 - 2007 AllBusiness.com, Inc. All rights reserved.