As a small business owner just starting, it’s good to know about all the funding options available to you. One such option is a business loan. A business loan is a multi-purpose business funding option, and you can get one with or without any security. Before applying, a few things you should consider are which lender to apply with, how much money you need, and for how long you need to borrow the money. The loan duration is known as the loan tenor or loan repayment period and can range from a few months to a couple of years, depending on a few factors. Sometimes, a short-term business loan is enough to fulfil your businesses’ financial needs.
Let’s find out whether a short-term business loan is a right option for you.
What is a loan tenor?
Your loan tenor is the duration you have to repay the loan. Also known as your loan repayment period, it starts from the date your loan is disbursed and ends on the date you pay your last EMI instalment… The portion of the loan amount to be paid in each EMI instalment is calculated by dividing the loan amount plus interest by the loan tenor.
So, the amount of your EMI will increase if you’ve taken a short-term business loan and will be lesser if your repayment period is longer.
What are the benefits of getting a short-term business loan for my business funding needs?
A short-term business loan is a great choice if your business is relatively young, you need cash fast, or you’re looking to build your credit history.
Lenders usually offer businesses short-term business loans in the form of unsecured business loans. Due to the lack of collateral when getting an unsecured loan, the repayment period is short, the interest rate is higher than a secured business loan, and the loan amount is comparatively low. This lack of security also makes an unsecured business loan easier to get since the lender doesn’t have to spend too much time verifying your information and the ownership and market value of the collateral you put up.
Due to the short repayment period, you can also repay the business loan fast, consistently building your credit history every month, which will make you eligible for a higher business loan amount in the future.
What factors should I consider when if I want to opt for a short-term business loan?
1. Purpose and size of the business loan:
You can use a business loan to fund many types of business expenses.
If you need a loan for working capital, then you should apply for a working capital loan which offers you loan terms catered to your working capital needs. Alternatively, if you’re looking for business funding to invest in a more long-term project, like opening a new plant, then a short-term loan is probably not the right loan tenor choice. As this investment will take some time to flourish, a long-term business loan will give you the flexibility to establish the plant, work out kinks in the system, start production, and begin to see a profit over a few years.
Once you’ve figured out how you will use the business loan, you will have a clearer idea of the amount of loan you need. Based on this information and your cashflows, you can decide on a business loan tenor with which you can easily keep up.
2. The size of your EMI due every month:
Based on your business needs and current business financials, the EMI value of your loan can also become a consideration when taking out a business loan. With a short-term business loan, the EMI amount due each month will be high since the loan amount will be divided into fewer instalments. Your EMI dues each month with a short-term loan will be lower, but you will be paying the EMIs for a longer time.
3. The interest amount you owe the lender:
Whether you get a short-term or a long-term business loan, the amount of money you pay the lender as interest will vary.
With a short-term business loan, you’ll be paying the lender fewer EMIs, so the amount of interest you owe them will be lower. A long-term loan involves multiple EMIs paid over the years. The longevity of such a loan means the total amount in the interest the lender makes from your business loan will be higher.
Business Loans. Enabled Simply.