Short term business loans: Interest rates, eligibility, advantages and disadvantages

 

Short term business loans – the name suggests that this type of loan is obtained for a short tenure and can be repaid in a few months. However, do you know its advantages and disadvantages? Are you aware of the ways it can help your business? This article will explain the definition of a short term loan, its benefits for the business, and comparison between short term and long-term business loans.

What is a short term business loan?

A short term loan is obtained to fulfill short-term business needs such business expansion, product launches, meeting marketing expenses, working capital needs, etc. Depending on the bank or NBFC one is opting for, the loan’s tenure can be between 1 to 5 years. It is usually approved and disbursed quickly.

Here are some prominent features of short-term loans.

• Purpose: Short-term loans can be obtained for meeting day-to-day business needs such as working capital needs, business expansion, etc.
• Involvement of collateral: Generally, the borrower does not have to promise any collateral for the short-term loan.
• Tenure: Depending on the lender, the tenure of short-term loans vary between 1 to 5 years.
• Documentation: Short term loan requires minimal documentation such as KYC documents and financial proofs.
• Interest rate: Interest rate for short term business loans vary from lender to lender. However, it can be anywhere between 10% to 30%. Some lenders indicate the rate of interest on per month basis, such as 1% or 2% per month. Therefore, it is best to verify the EMI and other terms and conditions before proceeding with the disbursal of the loan.

Note: Rate of interest is subject to change from time to time. Hence, it is recommended to check rate of interest at the time of borrowing.

Also Read: Business loan interest rates from top indian banks

Eligibility criteria for availing a short-term loan for business

Having a business bank account is one of the fundamental eligibility criteria. A key challenge that MSMEs, especially micro enterprises face with regard to eligibility criteria is not having a business bank account. Lenders are unable to determine cash flow history with no bank account or having opened the bank account recently. As a result, the loan may be rejected.

Lenders will ask questions before loan approval to ensure that you do not default. As such, make sure that you understand the eligibility requirements before applying for a short-term loan for your business.

Here is a list of some of the common eligibility criteria:

• The borrower must be the resident of India
• The borrower’s age must be between 18-65
• The company should be in business for minimum 2 years
• Business bank account statement to determine cashflow history
• A minimum credit score of 650 and above

Eligibility criteria are subject to change depending on the lender. It is recommended to check eligibility criteria with your bank or NBFC while applying for the loan.

How can short term financing help a business?

Short term loan helps the business in many ways. Here are some:

• Fulfills working capital requirements: Short-term business loans are ideal for meeting financial gaps in working capital needs. Or, if you are obtaining a loan for meeting other needs such as business expansion, it enables your business to grow.
• Cash flow improvement: MSMEs often face a cash crunch. Many times it is merely due to late payments from customers. Businesses can seek help through solutions such as MSME Samadhaan for this problem. While it gets resolved, small businesses can get immediate relief with the help of a short term loan and improve the cash flow of the business.
• Improving credit score: Obtaining a short term loan and repaying it as scheduled, enables the business to improve its credit score. Therefore, if you have a poor credit score or have no credit history, short term loan is an opportunity for you to improve or build a credit score.

Short term business loans advantages and disadvantages

While short term loans can help your business in many ways, it has its disadvantages too. Here are some of the advantages and disadvantages of a short term loan.

Advantages	Disadvantages
Collateral free	Higher interest rate
Quick approval and disbursal	Need proof of financial history, hence may not be suitable for newly formed companies
Improves credit score

Comparison: Short term vs long term business loans

	Short term loan	Long term loan
Collateral	Collateral free	Usually requires collateral
Rate of interest	Higher interest rate	Interest rate is lower
Tenure	Based on lender’s terms and conditions, tenure varies between 1 to 5 years	Depending on the lender, tenure is usually between 3 to 10 years
Purpose	Can be obtained for meeting needs of working capital	Obtained for a specific purpose such purchase of new machinery
Time for approval	Quick approval and disbursal	Approval is a lengthier process and takes time. It may involve bank official’s visit to the promised property that extends time for disbursal.
Documentation	Requires lesser documentation	Paperwork is more as it involves additional documents related to the promised collateral.

Understand that business loans are not the only form of financing available to your business. There’s the option of equity finance, invoice financing, line of credit among others. In certain cases, businesses can also consider the option to refinance a business loan to keep operations moving.

What should you do when you face financial crunch?

There are different types of loans available to meet financial needs. As a borrower, you can easily get overwhelmed while opting for the right one for your business. Here is how you can select the right loan offer for your business.

• Determine your business needs. Understand where the financial gap is. Do you need funds for working capital? Do you need funds for launching new products? Do you want funds to buy new machinery?
• Visit nearby banks and NBFCs and verify what loan schemes suit your business needs the most. Alternatively, you can also visit Tata nexarc to get a collateral free business loan. The entire process of loan approval is online. In a hassle-free manner, you can check your eligibility, upload documents and get loan offers from different lenders.
• Shortlist the loan schemes suiting your requirements. Compare available options. Verify loan amount, rate of interest, tenure, EMI, collateral, etc. Choose the one that suist your business needs the best.