Find out all about short term loans, and whether these loans are a good fit for your company’s needs.
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Short term loans are financing options set to be repaid within six months. Through a lender, you’ll obtain a lump sum loan, which will be repaid (along with the lender’s fees and interest) in regular installments.
Relative to traditional loans, short term loans are offered in smaller loan amounts, carry higher interest rates and shorter repayment periods, and typically require weekly repayments.
As its name suggests, short term loans lend itself to businesses in need of temporary capital. This could happen when unexpected costs crop up out of the blue or when cash flow gaps occur due to seasonal fluctuations. Due to the higher costs of financing, shorter repayment periods and lower loan amounts, short term loans aren’t a suitable option for financing large scale investments such as a major renovation project or long term expansion activities.
The following are general requirements that can help you assess if a short term loan is a good fit for your business:
You require quick access to funding: With alternative lenders, the application process for a short term loan is speedy and streamlined - the application takes place online, there’s little paperwork involved, you’ll hear about your application in as soon as 24 hours and gain access to funding immediately upon approval. This makes it a great option for SMEs in need of external financing urgently.
You need to handle unexpected expenses: Short term loans can be used to address a variety of financing needs - unlike some other loan types where restrictions are imposed on how the loan can be used. This flexibility, coupled with the quick access to funding makes short term loans an ideal financing tool for handling unexpected business expenses.
You don’t qualify for traditional loans: Alternative lenders often have less stringent borrower requirements; unlike banks and traditional lenders, these lending platforms don’t require a two or three year minimum operational history or stellar credit record. As such, it can be a viable option for small businesses or startups that fail to qualify for traditional financing.
You’ve got a steady cash flow: Instead of monthly repayments, short term loans are typically repaid on a weekly or daily basis. This is an important factor you’ll need to consider if you’re dealing with inconsistent cash flow, as it can be an uphill task meeting your loan repayments on time.
Build up your personal credit score
“Why should my personal credit score affect my small business loan application?” is a question many entrepreneurs wonder about.
That’s because your personal credit score is an indicator of how well you’re able to manage your personal finances - and consequently, shows your lender how reliable you’ll be with your business loan repayments. Having a strong personal credit score is particularly important if your company is a newly established venture without a financial track record.
If your personal credit score isn’t yet where you want it to be, here are some action steps you can take to bring it up:
Keep an eye on your credit report: Examples include restaurants and retailers.
Be timely with payments:With merchant cash advances, lenders place a greater emphasis on consistent credit card sales, and tend to be less concerned about a borrower’s personal or business credit scores.
Avoid making too many credit applications all at once: When you make a loan application, there are two types of checks that occur: soft pull inquiries and hard pull inquiries. The former takes place when your credit is reviewed as part of a background check, while the latter is generated when prospective lenders check your credit as part of a lending decision. Hard inquiries are recorded on your credit reports for two years, and may negatively impact your credit scores, while soft inquiries may be recorded as a file access. You’ll want to be careful about making several credit applications within a short frame of time, as that may send a signal to potential lenders that you’re scrambling for funds.
Having a well-managed online reputation is key
Increasingly, lenders are running a check across your online profiles to get a feel for how your business is doing, rather than solely assessing your application based on factors like having an established credit history or a specified minimum annual revenue. Here are some tips to help you managed your online reputation effectively:
Be responsive: How you communicate with your audience on social media says a lot about your business. If you’re responsive and timely with online messages and comments, you’re sending a message across to prospective lenders that you care about fostering positive customer relationships, provide outstanding customer service and are serious about your venture - all of which are signs that you’ll make a good investment.
Ask for reviews:Your online reviews provide a window into the operations of your business - it shows that you’re a reputable business, your products or services are in demand and that you’re engaging your customers effectively. Providing reminders via emails or push notifications and offering incentives are strategies you can implement to encourage your customers to leave a review.
Build thought leadership: Getting connected with influencers in your field, participating in community events and investing in a robust content marketing strategy are steps you can take towards establishing yourself as a thought leader - and your company as a reputable venture that makes a worthwhile investment.
Banks and traditional lenders typically have stringent lending requirements in place - such as having stellar credit record, a minimum operational history of two to three years or a minimum annual revenue of $200,000.
These requirements make it challenging for small businesses to qualify for traditional loans. While there may have been few SME funding options for business owners to turn to previously, the rise of alternative lenders have opened up new possibilities. Offering greater flexibility, streamlined application processes and speedy access to funding, these lenders can be a viable option for small business owners seeking external financing.