Do Short-Term Loans Work Out For Startups?

Key Takeaways:

1. According to the Bureau of Labor Statistics, 20% of small businesses and startups in the U.S. fail during their first year, with 50% failing within five years.
2. Insufficient startup funding is often a significant factor in failure. As a result, many entrepreneurs must consider taking out short-term loans to cover expenses and keep their business afloat until it becomes self-sustainable.
3. Short-term loans offer quick access to funds; the flexibility to meet immediate needs; lower credit requirements; no collateral required; and improved cash flow for startups that need help navigating financial gaps.
4. However, these types of loans come with high-interest rates due to a lack of collateral protection and quicker repayment schedules than traditional long-term loan options, which can become burdensome if not appropriately managed or repaid on time. 

Are you a startup owner? If yes, you must know the perils and pitfalls entrepreneurs face to keep their newborn businesses afloat. According to the Bureau of Labor Statistics, a staggering 20% of small businesses and startups in the U.S. fail during their first year. This number increases to 50% within five years, with an additional 15 percentage points added after the 10-year mark–leaving only 35% remaining! Business owners must take steps towards ensuring success if they wish for their company to remain afloat long-term.

Insufficient Startup funding was the main reason for that. While running a startup, you need a constant flow of investment until the business becomes self-sustainable. As a startup owner, you must consider different financing options available to support your business. Short-term loans are one way to weather the storm. 

Considering a short-term loan is a decision many entrepreneurs face and can be challenging. On the one hand, the loan can cover your expenses to keep the business running, while on the other, it can become a burden to deal with in the end. 7 Figures Funding explores the Pros and Cons of taking a Short-term business loan to help you decide what’s right for your business. 

Short-Term Business Loans-An Overview

What are They?

Before deciding on a short-term business loan, it’s essential to understand the basics. A short-term loan is typically borrowed for a short period and usually has higher interest rates than long-term loans. This type of loan is often used for businesses with seasonal or cyclical fluctuations in revenue and who need quick access to cash to cover short-term expenses.

Who Provides Short-Term Loans?

Short-term loan providers vary, but some more familiar names are payday lenders, alternative lenders, and online lending networks. While it’s essential to recognize that not all short-term loans offer favorable terms and conditions, many can be viable options for businesses needing quick cash.

What’s the Period for Repayment?

Short-term loans are expected to be repaid much shorter than long-term ones. Depending on the lender and loan structure, repayment periods may range from a week to a few years.

Short-Term Business Loan Pros

1. Quick Access to Funds

Short-term loan providers often have a quicker turnaround time than traditional lenders and banks, meaning you can access funds much faster.

2. Flexibility to Meet Immediate Needs

Short-term loans are typically smaller amounts, which makes them ideal for covering immediate needs or dealing with small cash flow gaps that don’t require a large amount of money.

3. Lower Credit Requirements

The credit requirements for short-term loans are often lower than those for traditional business loans and lines of credit, meaning more startup businesses can qualify.

4. No Collateral Required

Short-term loans usually don’t require any collateral like traditional loans, making them an excellent option for businesses that don’t have assets to use as collateral. But it may also depend on the lender. Consult with the lender regarding repayment and collateral before taking any loan.

5. Improve Startup Cash Flow

One of the main benefits of short-term loans is that they can help improve a business’s cash flow. The influx of money from a short-term loan can go towards things like payroll, paying bills, and purchasing inventory.

Short-Term Business Loan Cons

1. High-Interest Rates

Unfortunately, the downside of short-term loans is that they typically come with high-interest rates. Short-term loans usually have higher rates because they are unsecured, so the lender takes on more risk than if you were offering collateral.

2. Quick Repayment

Another potential con with short-term business loans is the quick repayment schedule. Often, short-term loans are due in as little as one month, while a more traditional business loan could have a repayment schedule of up to five years. However, through proper finance management, startups can use short-term loans to their advantage.

3. Potentially Limited Funds

The other downside of short-term financing is the number of funds you can get. Often, short-term loans are limited to a certain percentage of your assets or income, making it difficult for some businesses to access the capital they need to cover more significant expenses.

When to Consider Short-Term Business Loans?

Despite the challenges, short-term loans can still be an excellent opportunity for startups looking to cover immediate costs and keep their operations running with minimal interruption. Here’s what you need to know about when it makes sense to consider a short-term loan:

1. Need Quick Assess of Capital

If you need capital to cover an immediate expense, then a short-term loan can be a great way to access your needed resources. Short-term loans tend to have faster approval processes than traditional bank loans and other financing options, making them ideal for startup funding.

2. Purchase Inventory

If you need to purchase inventory or other materials to keep up with customer demand, a short-term loan can help get the job done quickly and easily.

3. Payroll Expenses

A short-term loan can cover payroll expenses when your company is between jobs, waiting for client payments, or operating on limited funds.

Related: Business Loan Requirements For Small Business Owners

Conclusion

Short-term loans can be an excellent way for startups to get the funds they need quickly, easily, and hassle-free. However, like any loan, there are risks involved that must be carefully weighed before proceeding. Considering all available options when looking into short-term loan solutions is essential. Make sure you understand your company’s financial situation and the costs associated with taking out a loan. That way, you can make the most informed decision possible to ensure that your startup is successful in the long run.

Optimize Startup Funding with 7 Figures Funding in Atlanta, GA

Short-term loans can be an excellent option for startups needing quick and efficient funding access. 7 Figures Funding in Atlanta, GA, offers reliable solutions with fast turnaround times and low-interest rates. We specialize in helping startups grow their businesses by providing the funds they need without the hassle of traditional bank loans. Besides short-term loan options, we offer credit card stacking and personal and long-term loan solutions. Get in touch with us to get started.

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