8 Factors To Bear In Mind Before Taking A Short Term Loan
Over the years, business owners have become aware of the fact that they cannot survive without short term loans. They need instant cash from time to time and it is practically impossible to arrange it internally. Short term loans serve as the ideal solution to bring in quick cash without much hassle. Additionally, the fact that these do not lead to a long term liability makes them ideal for a business. However, things are not as simple as they sound because loans are still liabilities irrespective of their time period. Therefore, you should know their nitty-gritty before you apply for them. Let us share a list of factors that you must bear in mind before taking a short term loan for your business.
Source of short term loan
The most vital factor to consider is the source you are going to get the loan from. You can either approach a traditional lender or borrow online. Traditional lenders include banks, credit unions, and private lenders. Borrowing from them involves a long list of formalities because you need to submit several documents as proofs for getting approval. Things are simpler with online lenders. You need not do much to get a short term loan here because the short term loan application process is as easy as filling a form online. The requirement of documentation is minimal as well and you can even get a bad credit loan.
Type of short term loan
Besides knowing the lender, you need to understand the type of loan you are planning to apply for. This will have a direct impact on the formalities of the application process. For example, personal short term loans require the submission of collateral deposits, business proofs, and income statements. With business loans, you need to mention the purpose of the loan, whether you require one as working capital or for business financing. Short-term loans for students have another set of formalities. Obviously, you would be more concerned about the second category of short term loans.
The next factor that would really matter while applying for a short term loan is the rate of interest you will have to pay. You would surely want to know the rate that the lender is charging and compare it with the prevailing rates in the market. Also, it would be smart to shortlist some reputed lenders and choose the one that offers the most competitive rate. After all, you would not want to pay an exorbitant rate of interest because it is a business expense.
Your credit score is an indication of your ability to repay the loan at the end of the term. Anyone who gives you a loan will be most interested in knowing whether you are capable of giving it back. Unless you have a great credit history to show, they will not be keen to help. It is to be noted that your credit score has a direct impact on the interest rate. A poor credit score obviously translates into a higher rate because the risk for the lender is greater. Since there is not much that goes in favor of your repayment capacity, you will have to pay a higher interest for bad credit loans.
Bad credit short term loans
Though bad credit lowers your chances of getting a loan, it does not mean that you will not get one at all. In fact, there are several online lenders who may be willing to provide you the funds you need. However, you have to convince them that you will pay back on time despite your bad credit history. This may be a tough challenge but you can show them proof like a healthy income and stable business for assuring them about your repayment capacity. Bad credit loans may be hard to get but there is nothing that makes them impossible to procure.
Term of the loan
As the name implies, short term loans are the ones that are taken for a short span of time. Business owners prefer this form of borrowing because it gives them instant cash for their needs without tying them with a long term liability and interest burden. They simply apply for the loan and use the funds in the present and quickly repay the loan, often within a few months. However, you must clarify the implications of not being able to repay the loan within the agreed loan term. The lender may give you the option of a rollover to carry the loan ahead for another term. But you may also have to repay by taking another loan if the lender is not willing to extend the loan.
Typically, short term loans are to be cleared over a short span of time by making regular payments to the lender. These payments are calculated by including the interest as well. Before you take a loan, you should know the entire repayment plan so that you can handle it comfortably enough. Discuss this aspect with the lender and have a clear idea about how repayment would work and whether you require any changes in the plan.
Besides the interest that you need to pay on a short term loan, the lender may also ask you to pay some charges and fees. These may be in the form of origination fees, administrating fees, underwriting fees, and processing charges. You may be taken by surprise because of these charges and fees. It is better to ask the lender to list the hidden charges upfront so that you can calculate the overall cost of the loan and decide whether it is feasible for you. It is better to look for a lender that does not burden you with such hidden charges.
Knowing these factors about short term loans is essential so that you know where you stand in terms of interest burden and repayment. Not having clear and proper understanding can cause problems and you may even be tied down by a loan that you may not be able to clear out within the agreed timelines.
Author Bio: A graduate in banking and finance, Marcus Ryan has worked for top financial institutes before he decided to make a switch to writing. Currently working as Content Strategist with Outreach Monks, he has an eye for what’s best and the rest.