It isn’t unusual for small businesses to experience seasonal fluctuations, as well as sudden shortfalls in cash or resources. If this happens to your business, you’ll not only need a backup plan, but you’ll also have to act quickly.
This is where short term business loans can come to your aid, as they are designed to offer your company a quick boost in financial support when you need it most.
Although short term loans offer a fast and flexible way to fund your business, they can turn sour if some important factors aren’t kept in mind.
By avoiding these short term business loan mistakes, you too can reap the funding benefits without falling into further debt.
Not having the required details on-hand
While applying for a short term business loan can be much quicker and simpler than other types of loans, it is still vital that you have the appropriate details available to help streamline the application process. The information and documentation required will largely depend on the lender (i.e. a bank or third-party lender), but as a rough guide, you can expect to be asked for any of the following:
- Information detailing the type of business you operate, your annual turnover, and the length of time your company has been in operation
- Your full contact information
- The purpose of your loan and how much you wish to borrow
- A realistic timeline outlining how and when you will pay back the loan (keeping in mind that it’s a ‘short term’ loan)
- Your credit history
Remember, many of the required details above will help the lender to determine if you qualify for short term funding, so it’s vital that you be honest, reliable, and professional. After all, no one wants to obtain a business loan, only to realise they could never have paid it back in the first place.
Ignoring the terms of your contract
As with all loans, when you acquire a short term business loan for your company, you are entering into a legal agreement with a third party. Before you sign on the dotted line, it’s vital that you know all of the terms of your contract, including what is required of you and what actions will be taken if you fail to meet those requirements.
Generally, you can expect your contract to contain the following information:
- The starting date of your repayments
- The amount of your short term business loan
- The interest rate applied
- The terms you must abide by
- The legal reprimands for failing to abide by these terms
If there are aspects of the contract that you don’t understand or are unsure of, ask the lender for clarification or seek legal aid from an outside source before you sign the agreement. As they say, it’s always better to be safe than sorry.
Not paying back the loan within a short time frame
As the name suggests, this type of loan is intended to be a short-term solution only, meaning that the amount owing will have to be paid back as soon as possible. Sadly, some recipients fail to pay their loan back within an acceptable time frame, resulting in additional charges that could truly sink their small business.
This is because, due to the shorter time frame of the loan, short term loans carry a sizeable interest rate. Therefore, the longer it takes you to pay back the loan, the greater the repayment amount will be.
It is also worth asking your lender if you can repay the loan early without penalty. Here at Sail, for example, we are one of very few business loan lenders who allow customers to do this.
Additionally, you should keep in mind that some lenders may offer a weekly or monthly repayment schedule, while others prefer to take repayments out on a daily basis. Always ensure you’re familiar with this schedule to prevent missed payments or extra charges.
Taking out more than one short term loan
Sometimes, depending on multiple factors, you may not be able to obtain a short term loan covering the entire amount you need. While it can be tempting to seek out additional short term financing options with another lender to make up the difference, we highly advise against doing so.
As we mentioned before, short term loans are expected to be paid back quickly, often in repayment schedules occurring daily or weekly. Therefore, it can become incredibly overwhelming and stressful trying to balance more than one of these at a time – particularly when your difficult financial situation is what prompted you to apply for a short term business loan in the first place.
Not taking your credit score into account
We hate to break it to you, but failing to pay back your short term loan within an acceptable time frame can damage your credit score, potentially affecting your ability to apply for further loans within the future. Even if you seek out a short term business loan from an alternative lender or third-party, the way in which you repay your loan will either help or hinder your credit score.
Some loan recipients fail to recognize this, and in turn, cause more harm than good. By staying on top of your loan repayments, or even repaying the loan early, you’ll be able to build (rather than break) your credit score.
Short term loans are beneficial for obtaining fast business finance, but if not maintained properly, they can create bigger problems for your SME. By avoiding the common short term business loan mistakes outlined above, you’re sure to reap the financial benefits of a loan, without suffering from further, unnecessary hardship.
Over to you! Does your business suffer from seasonal fluctuations? And have you ever considered a short term business loan?
We’d love to hear about your experiences in the comments below.