Short-Term Business Loans: Worth the Risk?

January 25, 2009 | Posted by admin

Short-term business loans are a way to see through slow times when profits are not what they usually are. These loans are ways in which the bills can be paid and still keep the business afloat. Short-term business loans can be an easy solution to raising the businesses falling capital to pay expenses. Most all businesses have felt the tightened purse strings one time or another. Short-term business loans: are they right for your business and are they worth the risk?

Any type of loan is a risk. Will the interest go up? How long will it take to pay the loan off? Will I have to put up collateral? And the questions go on and on.

There are five basic guidelines when applying for a short-term business loan: good credit, experience, equity, collateral and a business plan. Even if you and your business have all five of these basic guidelines, short-term Business loans are still risky.

Short-term business loans are however less risky than long-term business loans. Even though the short-term business loan will be paid back sooner the interest accumulation on this type of loan will not be as significant. Other loans that are longer would accumulate much more interest making the amount you would pay back even greater.

There are some short-term business loans that require collateral before the loan can be issued. The collateral can be anything from the building the business resides in to the merchandise and equipment it takes to run the business. However, the interest rates will more than likely be lower with a short-term business loan using collateral. This type of short-term business loan is much more risky than a loan without collateral. Using the business could mean losing it all if you the business owner is unable to pay the loan off.

With short-term business loans the time period can be anywhere between 90 days to three months for repayment to be made in full. The time given depends on the plans for the loan and the specific lender. When paying back the lender they want specific plans for repayment. For example, if you the business owner borrow money to purchase seasonal merchandise the lender would want his or her money back as soon as the seasonal merchandise is sold.

If repayment is not made, the lender has a few options. The loan could be restructured, making the repayment of the loan not as demanding. As second option, the loan could be increased to extend the short-term business loan until financial conditions hopefully improve for the business.

However, the third option is never good and is avoided unless all other options have been exhausted. The lender could foreclose on the business, making the business no longer. The lender has to sale off each part of the business: merchandise, equipment and the building itself to pay off the loan. Not only are short-term business loans a risk for the borrower because of not knowing if he or she will be able to pay the loan back, but it is also risky for the lender not knowing if they will get their money back.

Short-term business loans should not be confused with lines of credit for businesses. The short-term business loan is an amount that is determined by the lender and is given in one lump sum. The line of credit is just like that of a credit card. Not knowing what you the business owner are getting into is risky business. Know all the facts and ask questions if you do not understand, this will help you make a more informed decision.

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