Short-term business funding can give your company the boost it needs. Still, there are a few things that you need to consider before applying.
Any business can become cash-crunched at some point. Whether it’s an issue or an opportunity, the business needs a quick cash injection. When this happens, small business loans can be the perfect solution.
They can get you the working capital you need to keep everything running smoothly. If you play your cards right, this can be a smart business move.
However, many business owners rush into this decision before having all the information. To make sure this doesn’t happen, keep reading to learn about when short-term loans make sense.
What Is a Small Business Loan?
Short-term business funding lets you take out a smaller amount of money for an urgent matter. In general, the repayment period is between 3 months and a year.
With the right lender, the repayment can be flexible, so you can work out a schedule that fits your business needs. The loans are highly versatile, as you can use the money for nearly anything. They don’t come with restrictions, which is part of their appeal.
There are many benefits to taking out a short-term business loan. And yet, many business owners are hesitant about it. Even when the right loan can truly make or break your business.
If you want to maximise the benefits of this form of financing while eliminating the risks, you need to take a few things into account.
1. Purpose
The worst thing that you can do is to take out a loan just because. You need to think carefully about what it is that you’re trying to achieve with the money. Going into debt without a valid reason can do a lot more harm than good, so make sure that you’ll be using the money for something worthwhile that makes business sense.
Here are some of the situations in which a short-term business loan can be a good idea:
Discounted inventory purchase
Every once in a while, you’ll stumble upon a great deal with a vendor. Buying inventory at a discounted price can have a butterfly effect that results in significant business growth. You wouldn’t want to miss such opportunities due to a lack of cash.
Emergency repairs
Sometimes, loans are a necessity. If your critical equipment breaks down, you might not be able to keep the business running. This can create bottlenecks as you figure out how to resolve the problem. A much more convenient way of dealing with this is to finance repairs with short-term business funding.
Seasonal cash injection
If you run a seasonal business, you can established a pattern of revenue and expenses throughout the year. In some cases, you’ll need more cash than you have on hand to cover your peak periods, such as buying more stock and more aggressive advertising. A loan can make sure that your business has everything it needs to make the most of the best time of the year.
Upfront project costs
Sometimes, you’ll have to invest in a project that you can’t afford. If you’re certain that the project will turn out well, taking out a loan to finance it can be a good idea.
Debt consolidation
Taking out one loan to get out of multiple debts can often result in lower interest costs. The only exception is if this becomes a habit, which can significantly harm your business.
These are the main reasons that justify taking out a loan. However, there are a few other things that you need to consider before you do it.
2. Cash Flow
Cash flow is the lifeblood of a business. It’s much better to have a smaller amount of money available than relying on the money that you still don’t have.
As much as a short-term business loan can be quite helpful, it can put a strain on your cash flow. Before you get a loan, you need to be 100% certain that your revenue and cash flow can withstand this pressure. Failing to do this can hurt your everyday operations or result in defaults.
Think about the operational costs that you’ll have to cover during the repayment period. See if you can count on a stable revenue stream that you can use to honour the repayment schedule. If you’re not certain that you’ll be able to meet it, it might be better to wait a bit longer.
3. Early Repayment
If you need some quick cash that you know you can pay back in a few months, you should feel confident about taking out a loan. This is even better if the loan allows you to repay in full early and save on the interest.
Just be mindful of getting drawn into a vicious debt cycle. Many business owners use a new loan to repay the previous one, then another and another into infinity.
Even if your loan allows for early repayment, don’t do it through another loan. Only when you know that you can give the money out of your own pocket is it safe to think about early repayment.
In addition, remember that this doesn’t let you avoid all the interest but only part of it. It’s best to contact the lender to figure out the lump sum.
Does Short-Term Business Funding Make Sense for You?
Now that you’ve seen some of the main factors to take into consideration before taking out a loan, you can think about whether this would be the right move.
Obviously, the first thing that you’ll want to make sure is having a valid reason for getting the loan. Then think about whether you’ll be able to repay the loan without hurting your operations, and you’ll want to develop a contingency plan for the worst-case scenario.
If you’re ready for a loan, Unsecured Finance New Zealand might be able to approve it in no more than a day. Click here to learn more about how you can get the cash you need. And if you want to do it right away, fill out this form and apply for a loan in less than five minutes.
