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The Perils Of Funding A Business With Short Term Business Loans

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Funding your startup business is never easy. Meanwhile, few expert advisors may suggest taking out short term business loans as a feasible option. Well, they may be true to some extent, but people also find a few perils associated with it. Your options are limited. Hence, you will need to take every step and make every decision after giving a thought long enough. Moreover, you’ll need to do this for a couple of times. Here are a few sources that may come to your mind. These are all good sources sans the riders and limitations involved with each.

  • You may ask for such a loan from your friends and family members for a better chance to get it. Still, they will normally invest only a small amount.
  • On the other hand, being a new entrepreneur, traditional bank loans will be very difficult to find. Howsoever prospective and properly planned your business is, you will find them extremely unfriendly.
  • You may also choose to apply for government programs. But, to qualify for it is really a tough task due to stricter documentation requirements. Moreover, it will take months to investigate and get the amount.

All these pros and cons of each source, therefore, leave the entrepreneurs with no other option. Still, they can consider taking a small business loan for a short term from other lenders. This is particularly more so when the availability of ready cash becomes a serious issue for the existence of the business.

The Considerations to Make Before Going for The Option

However, before choosing this option, you need to understand what you are getting into and consider the following as well:

  • The capital requirement
  • The number of loans offered
  • The rate of interest
  • The monthly bill and
  • The fees and charges both apparent and hidden.

If anything does not seem attractive to you, do not go for it. It will be unwise to take a loan that you won’t be able to carry on paying for its entire term. This will damage your business credit making its future all the more difficult. You will not get any loan from any traditional banks and not even from other private and reliable sources such as liberty lending or any other.

Know the Perils

You must know the perils that accompany a short-term business loan. This is necessary, to avoid experiencing the same fate as most inexperienced and inadequately informed entrepreneurs face.

This type of lending will always come with a very high cost. In fact, it will be most expensive when you compare with the cost of any other loan you may get. Therefore, explore all other options before you finally decide to take on this type of loan. You can take out a second mortgage on your house or refinance your car. You can also apply for a new credit card or even ask your family members for a loan. These loans will cost you less.

You may choose an angel investor if you wish to take on a partner to bring money to your business. However, you will have to sell a part of your business to such an investor. Therefore, there are several precautions to take if you follow this route.

You may not have other options. Also, it may happen that, there are no viable investors, or you don’t have your own home. Moreover, your car loan may be maxed out. Or, the credit card companies may have denied you due to your bad credit. Hence, one of the most sensible things to do is to take on a short term alternative lending.

Time is the Question

The key question here is of the time for which you need this loan. Also, you need to know, what is the full meaning of the term ‘short term.’ For this, you need to go to the basics.

  • If you have no source to raise capital and are in dire need of money for the long term, the best thing to do is close down your business. No matter how harsh and demoralizing it may sound to you, this is the best thing you can do due to several reasons. No matter how hard you try, there is no legal enterprise that will deliver you a return of more than 36% in the end. You will have to earn more than the cost of capital or else you will eventually have to go out of business in any way. Facing that fact today is much better than realizing it in a hard way a few months later when you have already incurred a fair amount in losses.
  • On the other hand, if you really need money for a short time only, then such a loan will make a lot of sense to take on. Even if it comes at a very high rate of interest, it will allow you to keep on working. You will be able to pay the supplier who is refusing to provide materials if the earlier payments are not made. Just make sure that the number of money customers owe you is enough to cover the loan obligations and you expect to receive these payments soon in the future.

Therefore, time and a proper forecast of your business is the key to take on any loan to be a successful entrepreneur.

Some More Precautionary Measures

Moreover, you will need to be very cautious with the moves you make because there are a lot of lenders out there that prey on small business entrepreneurs who are not financially very strong or sophisticated but have a dream to achieve. These lenders in most of the times charge a very high rate of interest to provide you with the desired financial help for a short time. Accepting these loans will push you into a deeper hole of debt in the long run.

There are few things to consider before you opt for such loans that will keep you safe in these difficult times such as:

  • Know the loan rates and terms
  • Know your business as well as finance situations
  • Apprise yourself of the lenders and their repertoire and
  • Never take a loan that you cannot afford.

These considerations will help you to choose a loan that is most appropriate for your business.


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