The Pitfalls of a Short Term Business Loan

Short term business loans offer businesses the opportunity to arrange immediate financing for pressing financial needs. When your business must come up with funds to fill an order, expand production or make up for an account receivable delay, you may consider a short term loan option. While these loans certainly help business owners get over small lapses in profit, they present many pitfalls along the way.

Falling into a Cycle of Debt

Most businesses operate on a debt cycle to some degree. It is necessary to take a loan out to start up operations for most industries, and these initial loans are repaid with initial profits. For many businesses, this trend continues, with a new loan being required for each step in expansion. In the end, businesses are giving away key profits to paying back loans plus interest multiple times a year. The goal should be to get to a place where your business stands on its own with significant cash reserves to smooth over delays in payment and provide for moderate expansion. Only when you have these reserves do you have sufficient business equity instead of only business debt.

Failure to Arrange Permanent Financing

While the goal is to stand on your own feet as a business, it is best to always have some amount of permanent financing in place to use when it makes financial sense to do so. Just as most individual households have credit cards for making large purchases, reserving plane tickets or buying items over the Internet, a business should have open credit lines to do the same. Without a business credit line, you will find restrictions in making some necessary moves as an organization. If you constantly rely on short term financing, you may neglect the opportunity to truly arrange a permanent solution.

Accepting High Fees

Short term loans often have higher fees than long term financing arrangements. These loans are distributed at times when businesses cannot wait for a permanent solution, meaning they are often sourced in haste. Whenever you take out a loan quickly, the lender will capitalize on your need for immediate financing by charging you a slightly higher rate. As a business, you will be spending far too much on interest each year if you constantly agree to high rates in hasty situations instead of slowly assuring your short-term arrangements meet your long-term goals.

Failing to Research Loan Options

Another issue that arises when loans are sourced hastily is a failure to fully research the options your business has. In fact, you may be eligible for low-cost government loans, local grants or secured credit lines. All of these will save you money, but each will also require more time to be spent during the application process. You may also discover there are opportunities to gain investor funds to boost your business without going into debt. Your business credit score will respond better to these less risky loan options, making you more secure in the long run. Ultimately, short term loans are fine for the short term. They should not, however, be your primary source of business cash flow.