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Advantages and disadvantages of Short-Term Loans 

Like any other loans, short-term loan also has its upside and downside. If you are wondering what those are, check the advantages and disadvantages of short-term loans listed below. 

 

Short-term credit 

This is a kind of business financing orem utah where the principal amount and the interest should be paid within 1 year that is why it is short-term credit. This is mainly used in working capital requirements and financing operating expenses.   

Advantages 

  • Faster application 

This type of loan has a maximum term of one year. The application for this type of loan is not very strict and much quicker compared to long-term credit because the amount you could borrow is much less. Usually, if your documents are complete, it will take up to 24 hours for you to know if your application has been approved.  

  • Quick access to capital 

in addition to the above statement, short-term credit application process and even the releasing of funds is much faster than long-term credit counterpart. Your funding is released immediately for you to use the cash for emergency expenses or to pay you supplier or employees. 

  • Less restrictions 

It is not only that the approval of the application and the releasing of funds is fast but also requires less documents compared to long-term credit because you are not borrowing very large amount of money for a company and the lender has lesser risk. As there is much less risk involved, the lender will likely not to enact provisions like salary caps or and approval or rejection of business expenses. The lender will not also likely to keep an eye closer to the business which will result to limit your decision making. 

Disadvantages 

  • Higher costs 

Because of efficient and quick access to the capital, short-term credit has a high-interest rate, however, there are cases that low-interest rate loan is not always the best option. For you to fulfill orders and deliveries to generate sales, it is better to take a short-term credit with high interest and have sales than not having a loan and no sales either because you have no capital. You must assess first the situation when making a business decision for there are no two situations that are exactly alike.   

  • Can open a cycle of repeated borrowing 

As your application is quick and you can get the money immediately, short-term credit might be a quick solution. If you will get used with it, it may become a cycle of borrowing repeatedly. If you are taking a short-term credit this month for paying your employees and take out another one on the next month is maybe a sign that your business is not doing well. Then don’t take out short-term financing on a regular basis because if you will become dependent on it is bad for your business. 

  • Unsustainable in the long run 

As mentioned before, it is bad for a business if having a short-term financing on a regular basis because in the long run, it becomes unsustainable. And as the goal of the business is profit but if you will take loan regularly just because your revenue can’t cover your expenses, then it means you’re not making any profit.