There’s a lot of controversy around short term loans, but here’s the thing: there are times they make great financial sense. We’re listing five of them here.
You’ve probably heard about short term loans (or payday loans) before, and more than likely, it was when someone was telling you how terrible they are. With high-interest rates and short windows to pay them back, short term loans can seem like a dangerous financial manoeuvre.
But if there were no beneficial scenarios for getting a short term loan, then why would they exist in the first place? Is it just to prey on the poor and desperate?
Well, you might be surprised to learn that there are legitimate cost-effective reasons for taking out short term loans, and you would be lucky not to run into one of these situations at least once in your life.
Today, we’re focusing on what short term loans can do for business. But these reasons could apply to nearly anyone. So, whether your loan is for your business or for personal reasons, here are five times when getting a short term loan might make the best financial sense for you!
What are Short Term Loans, Exactly?
Short term loans are small loans designed to meet short term financing needs. They typically have a repayment window of less than a year and interest rates starting at around 14%. You can get the cash flow boost you need within a few days to take care of your immediate financial needs and set up a payment structure to pay it back.
Short term loans have a reputation for being a bad investment for individuals, but a flexible financial tool for businesses to grow or overcome financial obstacles.
While there are indeed many situations where a short term loan would be a poor investment, even private individuals can find themselves in a situation where immediate cash flow is necessary to avoid even worse consequences or fees.
When are Short Term Loans a Good Idea?
1. Startup Costs for Your Business
In most situations, when covering startup costs for a new business, it can make sense to go with a larger long-term loan, so you have longer to pay it back if your business doesn’t turn a profit for the first year or two.
However, your business might find that it needs to secure provisional patent protection or fulfil an immediate market demand that could quickly be covered and paid back with a short term loan.
If your business plan projects a quick influx of cash, then you could even use a short term loan to cover the total startup cost for your business. You might only need a small amount of cash flow to get your business up and running or to take care of unexpected small, but necessary operational costs (like a projector for the conference room or digital cloud storage).
A long-term loan wouldn’t make sense in these situations because the cost is low and your ability to pay the loan back is immediate.
Long-term loans are generally large and can have repayment schedules of up to 30 years. Banks see long-term loans as an investment in you, so they’re willing to put up large amounts of cash if they’ll make a profit over time. They’re less willing to give you a loan that you can pay back quickly without incurring any interest.
2. Seasonal Gaps in Income Accounts
Most businesses will experience a fluctuation in their balance of supply and demand throughout the year. Major holidays usually affect business in one way or another, and short term loans can be a cost-effective way of offsetting those fluctuations.
You might need to prepare for Black Friday or Christmas by ordering more supplies than you carry for normal operation and need a short term loan to cover the costs
Alternatively, you might have an extremely slow season every year around February. A short term loan can be a great financial tool to keep the lights on and your employees paid until business picks back up again.
3. New Revenue-Generating Opportunities
The old saying goes, “You have to spend money to make money.” There are many situations where you or your business will come across an opportunity to create a new source of revenue, but it requires an initial investment to implement.
If you don’t have the cash on hand to make that investment, then you could either lose that source of potential revenue or you can take out a short term loan to invest, then use your earnings to pay the loan back.
4. Unexpected Expenses
Whether in business or in life, we can’t always predict the future. Machines can break down without warning, clients can unexpectedly hike up their prices, or someone could get in an accident on the job and require you to pay medical expenses.
These little unexpected misfortunes can’t be budgeted for because you never know when to expect them. This is a good time to take out a short term loan so that your business can keep running smoothly without having to cut the budget in other areas.
5. Avoiding Fees
Finally, short term loans can be a good financial decision if you’re going to incur expensive fees or penalties that amount to more than the interest on a short term loan.
When it doesn’t seem like you’re going to have the cash flow to make a particular expense, and you know that it will lead to late fees, penalties, or overdraft fees, then it’s in your best financial interest to take out a short term loan and pay it back quickly.
Short term loans aren’t right for everybody, and they aren’t right in every scenario, but they make sense in situations when you would otherwise have to pay more.
Whether you’re starting a business or just trying to pay your rent month to month, you just can’t plan for every scenario.
When you find yourself in those hard times, you need to be aware of all your options. If you’re trying to avoid extra expenses or if you’re trying to grow your business, taking out a short term loan just might be the right option for you!