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Short-Term Business Loans

Short-term business loans are one of the instant funding solutions for businesses facing immediate financial needs or planning for growth and expansion. Whether it’s a small enterprise, a startup, or an established company, short-term business loans provide the necessary financial flexibility to navigate challenges and seize opportunities. By understanding the features, benefits, and application process of short-term business loans, businesses can make informed decisions.

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What are Short-Term Business Loans

Short-term business loans are designed to provide immediate funding for the short-term needs of businesses. The loan amount of short-term loans starts from Rs.1 lakh and goes up to Rs.1 Crore. However, the repayment tenure is typically less, varying from 3 to 24 months. Short-term loans do not require any collateral. Interest rates may be fixed or floating, and they are usually higher compared to long-term loans. Lenders evaluate various factors, including the creditworthiness of the business, revenue, profitability, years in operation, and industry stability, to determine eligibility for short-term business loans.

Types of Short-Term Business Loans

Working Capital Loans: Working capital loans are designed to meet the day-to-day operational expenses of a business, such as purchasing inventory, managing payroll, covering rent, or paying suppliers. These loans provide short-term liquidity to ensure smooth business operations.

Overdraft (OD) Facilities: Overdraft facilities allow businesses to withdraw funds exceeding their account balance. Overdraft facilities can act as a short-term loan option to manage temporary cash shortages.

Trade Finance: Trade finance options, such as letters of credit (LC) and bank guarantees, help facilitate domestic and international trade transactions. These financing instruments enable businesses to secure payment terms with suppliers or ensure the fulfilment of contractual obligations, thereby reducing risk and facilitating smoother trade operations.

Invoice Financing: Invoice financing, or invoice discounting, allows businesses to leverage their unpaid customer invoices as collateral to access immediate funds. Lenders provide a percentage of the invoice value upfront, helping businesses bridge the cash flow gap caused by delayed payments.

Equipment Financing: Equipment financing provides businesses with the necessary funds to acquire or upgrade equipment, machinery, or other capital assets. These loans have a shorter repayment period and are secured by the equipment being financed.

Government Schemes: Several government initiatives and schemes to support small businesses, including short-term loans with favourable terms and interest rates, are available. Exploring these Government Business Loans can provide additional funding options for eligible businesses.

Documents Required to Apply for a Short-Term Business Loan

  • Business registration documents
  • Financial statements like profit and loss statements and balance sheets
  • Income tax returns
  • Bank statements
  • KYC documents of the business owners

Benefits of Short-Term Business Loans

  • Faster Approval: Short-term business loans offer faster approval and disbursal than traditional long-term loans, enabling businesses to address immediate financial needs promptly.
  • Flexibility: These loans can be used for multiple purposes, such as bridging temporary cash flow gaps, purchasing inventory, upgrading equipment, managing seasonal fluctuations, or taking advantage of business expansion opportunities.
  • Easier Qualification: Short-term business loans often have more lenient eligibility criteria, making them accessible to a broader range of businesses, including startups and SMEs with a limited credit history or lower collateral.
  • Less Documentation: Since the eligibility criteria are lenient, the number of documents required for a short-term business loan application is also less. Hence, the process becomes faster.

Factors to Consider Before Applying for a Short Term

Assessing Financial Needs: Businesses should evaluate their precise funding requirements, considering factors such as working capital needs, investment opportunities, or specific short-term financial challenges they must overcome.

Interest Rates and Fees: It is essential to compare interest rates, processing fees, prepayment penalties, and other charges associated with short-term business loans in India to determine the overall cost of borrowing.

Repayment Options: Understanding the repayment options, such as monthly instalments, bullet payments, or flexible repayment schedules, helps businesses align loan repayments with their cash flow patterns.

FAQs on Short-Term Business Loans

What is the loan amount for short-term business loans?

Short-term business loans in India can range from INR 1 lakh to INR 1 crore, depending on the lender and the borrower's eligibility.

What is the repayment period of short-term business loans?

The repayment tenure of a short-term business loan varies from 3 to 24 months.

What are the eligibility criteria for obtaining a short-term business loan in India?

The eligibility criteria for short-term business loans include the business's creditworthiness, revenue, profitability, years in operation, and industry stability. Banks typically evaluate these factors to assess the borrower's ability to repay the loan.

What is the disbursal time of short-term business loans?

Short-term business loans are supposed to be disbursed in a short span, say 10-15 days from the date of approval. However, the time varies from lender to lender.

Can a person with bad credit apply for a short-term business loan?

Some lenders in India offer short-term business loans to businesses with less-than-perfect credit scores. These lenders may consider other factors, such as the business's revenue, cash flow, and industry stability, when evaluating the loan application. However, the interest rate and processing fee for this kind of applicant are higher than the regular customers. In case of a bad credit score, you can go for collateral loans.

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