Many businesses are not always able to operate just on the cash they have in hand. In today’s world, it is not unusual to wait 30 days or longer until your invoices get paid. That leaves many businesses with profits on the book that they are unable to monetise on an immediate basis. This is where short-term business loans come into the equation.
Short-term business loans are, quite obviously, temporary credits that companies use to paper over the on-again off-again nature of entrepreneurial cash flow. A good example of this is the need for certain retail operations to stock up for holiday sales.
Many companies book anywhere from 30-50% of their annual sales in that season, which also means that they need extra inventory on hand in order to meet that sudden surge in demand. Yet the sales they have during the rest of the year are insufficient to pay for all those extra goods. Short-term business loans provide the necessary jolt of capital in order for the company to thrive and grow.
They can also be used to finance an important new productivity enhancer such as a new dump truck for a landscaper or for startup capital on a second location for a restaurant. In all of these cases, the idea is to take on some very short-term debt (1 year or less, by definition) in order to ramp up the money-making capabilities of the firm. Or, in some cases, it can also be used to tide the firm over a temporary crunch where payroll and other expenses need to be met if the doors are not to be closed.
Since these are so very short-duration in nature, it is most likely that there will be extra fees and a higher interest rate as opposed to a long-term credit arrangement. Also, for new businesses, it is common for the lender to insist upon some form of collateral due to the short track record of the firm in need of financing.