Question

Explain the advantages of short-term loans and the 4 main options companies have when pursuing a short-term loan.

Answer 1

Short term loans are Loans which are to be repaid within Short Period of Time. They are essential to support the Business capital temporarily.It helps to Expand Business more Easily and Rapidly.

Advantages

1. Cost Effective

In an Average Commercial Business Loan ranges from 2-20% APR( interest rates are stated on an APR-annual percentage rate) fro Interest,A loan offering a 20% APR (annual percentage rate) but lasting for only 6 months would, in effect, have a real APR of 10%. Because short-term small business loans are repaid more quickly than longer-term loans, and lenders get their funds back quicker, they can often cost businesses less than longer-term loan options.

2. Improves Cashflow Issues

During Off-Season the sales may be Down and during this period Small business may face the Risk of shutting Down their Business ,but if they Plan to get Short term loan they could pay off the supliers Bill and they could get rid of any problem with IRS, while paying Taxes.

3. Speed

Short Term Loans are approved with no time they are really fast to get apporved compared to Long Term Loans. In an average it may take 24 to 72 Hours to get Short term loan approved.They dont require much Time Because they are not given after taking Close Examinations or after long Procedures. Even if the Company don't have Large Cash Reserve or an Unattractive History it doesn't get count.

4. Short term Expenses

The increased speed of repayment and shorter term of a short-term business loan means that they are best suited for short-term expenses. The Fund is utilized for things like purchase order financing, temporary increases in staff or labor, and short-term operational expenses that will provide a return within the term of the loan.

4 main options companies have when pursuing a short-term loan

• Trade Credit - It is One of the cheapest , here interest Free Money are Available product or service from another company are bought, they give you time to pay for it at no additional cost.Longer the time vendors give, more the cash is retained for other purposes Common terms are 30 days but consider asking for as long a term as possible (initially 45 days).
• Account Receivable Factoring- This is one of the best option where Customer Invoice is converted into Cash. The Account Receivable Factoring Company provides 80-90% Cash to the company having Outstanding Invoices. And later on the Customers who had to pay .
• Bank Overdraft- This is a Feature made available by various Financial Institution where its customers who are having a business Account can withdraw Money than the Balance they have in their Account and they could repay the money Back within a Year.
• Online loan Brokers- These are some Brokers over the Internet ,they help small Business Owners to get Money for Short term Purposes .Hence they Connect these owners with Money Lenders who provide Credit. They usually ask for Credit scores,sales and Profit of the Company.The APR are 10-24% which is slightly high.