What are the pros and cons of short-term business loans?

When any entrepreneur starts a business, the one thing they need is uninterrupted capital. However, there are two sources for an entrepreneur to raise funds to invest in various business activities: the first is from their savings, and the other is through external sources. As the capital need is constant, using savings is not the best option. Hence, entrepreneurs looking to raise adequate capital look towards external sources of funds.

Among various external sources, a short-term business loan is one of the most sought-after options. However, like other types of loan products, business loans for the short term also include some pros and cons. This blog details the advantages and disadvantages of short-term financing through business loans.

Pros and Cons of Short-term business loans
This loan type has become one of the most preferred options for entrepreneurs to ensure they have adequate capital to run business activities smoothly. However, as business loans are debt instruments which create a financial liability for the borrower, entrepreneurs prefer to take a short-term business loan.

This loan option ensures they can overcome financial liability by repaying the business loan in the short term. However, business loans have some cons, too. Here are the advantages and disadvantages of short-term financing through a business loan.

The Pros
• Immediate Capital
Business loans for the short term allow entrepreneurs to raise immediate capital to cover their existing liabilities. The loan process is quick, and the disbursal is instant, typically within 48 hours.

• No Credit Checks
Generally, having a bad credit score may disqualify the applicant from taking a business loan. However, some reputed financial institutions provide short-term financing without extensive credit checks. Once the applicants fulfil the eligibility criteria, they get the loan amount instantly.

• Better Control
Entrepreneurs have two options to raise funds: VC funding or business loans. With VC funding, the business owners have to sell a share of their company, which reduces their control over the enterprise. Alternatively, small business loans do not require selling a company stake but only the repayment of the loan amount over time, thereby giving better control over the business.

• Short-term Liability
Short-term business loans have a brief loan tenure, often just a few months. Short tenure means an entrepreneur can repay the loan in fewer EMIs than a long-term business loan. A shorter loan tenure also allows entrepreneurs to limit their financial obligations in the long term.

The Cons
• Higher EMIs
Traditionally, with business loans, the longer the tenure, the lower the interest rate. Thus, the resulting EMIs are higher for short-term business loans. The EMIs include a portion of the principal amount and the interest but are higher than a long-term business loan, forcing entrepreneurs to shell out a high monthly amount.

• High-Interest Rates
Interest rates on loans are directly proportional to the loan tenure. It means that the longer the loan tenure, the lower the interest rate on a short-term small business loan. However, since business loans for the short term have short loan tenure, they generally have a high-interest rate.

• Financial Obligations
Business loans for the short term create financial liability. It can burden the entrepreneur financially if the business is not cash positive.

• Eligibility Criteria
Lenders only offer the business loan amount to entrepreneurs who fulfil the set eligibility criteria. Often, entrepreneurs who have just started their businesses may find the eligibility criteria rigid and fail to fulfil the set factors. This factor can make qualifying for a business loan difficult.

Avail of Best Short-term Business Loans From IIFL Finance
IIFL Finance is India’s leading financial service provider, specialising in a host of loans with a particular focus on the best short-term business loans. IIFL Finance’s business loan offers instant funds up to Rs 30 lakh with a quick disbursal process online and minimal paperwork. The loan’s interest rate is attractive and affordable to ensure the repayment doesn’t create a financial burden. Apply for a short-term business loan with IIFL Finance now!

For more info, visit www.iifl.com

FAQs:
Q.1: How much time does it take to approve the IIFL Finance business loan?
Ans: IIFL Finance business loan is approved within 30 minutes of application.

Q.2: What is the loan tenure for IIFL Finance’s business loan?
Ans: The loan tenure for a business loan up to Rs 30 lakh is five years.

Q.3: Is there any need for collateral for taking a business loan from IIFL Finance?
Ans: No, you do not need to pledge any asset as collateral to take a business loan from IIFL Finance.