Navigating Short-Term Business Loans: A Guide for MSMEs

Do you operate a company and need money fast to deal with unforeseen costs or make up for a shortfall in working capital? You could find help in the form of short-term business loans. With the rise of the country’s tech sector and startup scene, short-term loans in India have become increasingly common. This post will examine all aspects of short-term loans, including their benefits and cons. We will discuss the advantages of short-term financing for businesses, including bank overdrafts and invoice factoring. You can get a short-term loan without setting up any collateral if you are self-employed or have a regular job. Nevertheless, remember that the criteria for approval of a short-term loan can vary greatly amongst various lenders. In this article, let us delve deep into short-term loans.

Everything You Need to Know About Short-term Business Loans

Short-term business loans have short repayment terms because they are meant to be a short-term solution to cover unexpected expenses or gaps in working capital. Businesses can enjoy the unrestricted cash flow without a lengthy waiting and sanctioning process. However, the company must still repay the loan and interest by the agreed-upon deadline.

Paying employees’ salaries, buying raw materials, funding expansionary measures, and purchasing equipment are only some examples of a firm’s immediate cash flow needs. But a new company may not yet be established enough to be considered a low-risk borrower by banking institutions. That’s why it can be hard for a brand-new company to get approved for a bank loan the traditional way. A short-term loan might be a great help in these situations.

Due to the fully digital method provided by certain lenders, business owners can gain access to credit financing without putting up any collateral. This funding option makes repaying the debt simple and inexpensive. It’s important to keep in mind that the prerequisites for getting approved for a short-term loan can vary widely amongst different lenders.

Drawbacks of short-term loans

Short-term loans have a few drawbacks. They are:

  1. Short-term loans have higher interest rates than their longer-term counterparts.
  2. The amount available for a short-term loan is usually not large enough for some enterprises or individuals.
  3. Repayments on short-term loans are due more frequently, which might put a dent in available funds.
  4. The shorter payback period increases the probability of defaulting on short-term loans.
  5. A borrower’s ability to get future loans may be hampered if they have a low credit score because they were late paying back a short-term loan.

An Overview of the Features of Short-term Business Loans

The following are some of the defining characteristics of short-term loans in India:

  1. Disbursement times for these loans are typically much shorter than for others.
  2. Short-term loans typically include negotiable interest rates and repayment schedules.
  3. This loan may be available to both self-employed people and employees, depending on the lender’s guidelines.
  4. Most lenders’ applications and approval processes are conducted digitally, and borrowers can tailor their EMIs to their company’s cash flow.
  5. The amount of the received credit can be used for whatever purpose.

Also Read: Why Indian MSMEs Should Embrace Blockchain Technology

An Elaborate Explanation on the Types of Short-term Business Loans

Short-term loans come in a variety of forms in India. They are:

Bank overdraft

By establishing a credit line, banks allow customers to overdraw their accounts and make purchases in excess of the available funds. Overdraft protection will enable customers to make purchases and withdrawals even when their account balance is negative. These unsecured loans are for temporary financial requirements only. Overdraft interest rates and maintenance costs can fluctuate depending on your creditworthiness and chosen lender.

Demand loans

These loans are called working capital loans, a form of secured credit that can be used to swiftly access money for short-term needs, such as purchasing supplies, paying staff, or covering rent. They work wonderfully for new businesses. You can get your hands on these loans whenever you need them.

Trade credit

A trade credit allows a business to sell goods or provide services to another business without immediate payment in exchange for the right to be invoiced at a future date. Invoices are used as proof of payment, and the credit period might be thirty, sixty or ninety days. In this way, companies can get the supplies they require without having to come up with the money right away.

Line of credit

A LOC (line of credit) is a sum of cash from which a borrower can draw as needed, up to an agreed-upon maximum. With a line of credit, the borrower can use the funds as needed up to the credit limit, and as the funds are repaid, they become accessible for more borrowing. In times of financial emergency, this is a practical and adaptable option.

Merchant cash advance

Traditional merchant cash advances (MCAs) for small businesses involved a one-time lump sum in exchange for a cut of the business’s future credit card and debit card transactions. However, the word is increasingly commonly used to indicate a wide variety of financing options with short payment durations (generally under 2 years), smaller, more regular payments (sometimes paid daily), and higher interest rates than conventional bank loans. Credit card sales in the future can be bought, or a company can take out a short-term loan.

Invoice factoring

This is a type of invoice financing in which a business sells its outstanding invoices to a 3rd party in exchange for immediate cash. The business receives an advance on its invoices from the factoring firm, which then pursues the remainder of its revenue through customer billings. The business may get paid faster for its invoices and stop waiting for clients to settle.

Final words
Short-term loans can be a significant factor in helping firms fulfil their requirements for working capital and grow sustainably in today’s fast-paced economy. They may be an excellent option for startups, SMBs, and MSMEs in India looking for a quick cash infusion to meet immediate financial obligations. Given the loans’ accommodating terms and conditions, they are available to new businesses even if they lack the assets and security required for more conventional forms of financing.

MSMEBlog provides expert solutions and guidance for financing MSMEs. For more information on MSME finance, visit MSME Blog website.

Leave a Reply

Your email address will not be published. Required fields are marked *