What Difference Can A Short-Term Loan Make For Your Business?
Sometimes you just need some fast cash for your business. A short-term loan can make real sense if you need money right now. But when it is a good idea to apply for a short-term loan? What kind of events make it necessary? And how much of difference does it make if you get one?
Perhaps the best use of a quick infusion of cash is to grab a good deal. Some opportunity that comes up quickly but has the potential for a high return on investment (ROI). Let’s say you have a chance to pick up a huge order, but the buyer won’t pay for 90 days, and your supplier needs their money in 15. Getting a short-term loan to pay your supplier allows you to seal the deal and make the big profit. However, you should make sure that the profit margin is greater than the cost of the loan, plus interest.
Fix Cash Flow
If your customer base is all made up of intermittent or slow payment cycle clients, short-term loans can help level out that cash flow. Instead of laying off employees and rehiring, you can keep them on and produce more goods or upgrade your facilities. Remember most of these loans have daily or weekly payment schedules which will impact your cash flow in the other direction. Balance these factors as much as you can and don’t take a loan that won’t make you money.
During the Christmas holidays for example, retail outlets may need to ramp up just before the season begins. A short-term loan can give them the flexibility and capital to get ready for their high-profit season and pay it off once the season is underway. As always, make more than you spend on the loan.
Usually, expansion is a fund with longer-term loans, but this might be another opportunity. A new location opens, or used equipment comes on the market. With the money in hand, you can take advantage. Revise your business plan and forecast how this expansion will help you profit. You have to bring in more than you pay for the loan.
Only in the most dire of circumstances should you try to refinance using short-term loans. These are the most expensive kind of loan, and it’s unlikely the debt you have now costs more than a new loan. Even credit card debt is at a lower annual percentage rate (APR). And avoid the trap of getting a new short-term loan to pay off the last one. You can spiral into debt and bankruptcy quickly by doing that.
Another tight spot can present itself when you don’t plan appropriately for tax time. As long as your business is doing well, and you have plans in place to prevent this from happening again, a short-term loan can keep the IRS from being upset with you. Before committing to a loan, contact the IRS directly and see if they will negotiate a deal to allow you to pay late with a penalty. Is the penalty cheaper than the cost of the loan? It’s possible. Short term loans can be very expensive.
Sometimes things just go catastrophically wrong. A piece of critical equipment fails. The roof collapses. Your location is hit by a hurricane. Many of these call for insurance rather than a loan, but sometimes insurance companies can be very slow with the payments they owe you. A short-term loan can bridge the gap between needing the money and getting the money.
If you were unprepared, uninsured for whatever lousy luck dropped on you, and you need a loan to keep going, make sure you have a plan for paying the loan back. A guaranteed plan that is absolutely assured. In the event that you were to default on the loan, it could destroy your business as well as your credit, and leave you much deeper in debt than if you had just walked away.
Be sure you know if there are penalties for paying your loan off earlier than expected. Few short-term loans will reduce any of the interest, but some may even charge extra for early payment. Avoid repeated short-term loans, one after the other. This kind of debt cycle costs money in almost every situation and may indicate a failing business being propped up by spending cash on expensive loans to support it.
You may have spotted a recurring theme in these examples. Be sure you can pay and be sure what you get with your short-term loan makes you more profit than the cost of the credit. Anything else is a sure road to failure. Defaulting on loans has serious consequences and failing to profit from the use of a loan is as good as throwing money away. And no business can succeed by throwing away hard earned cash.
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