In the business world, maintaining the working capital or the cash requirements for day to day operational activities is a common problem, especially for small businesses. These businesses heavily rely on the receivables in order to replenish the working capital and at times, it may be the only source of funding for emergency situations as well as for small scale expansion activities. In any event, it is not the ideal situation for a small business which is trying to stand on its feet in the initial few years.
What is the appropriate loan for a small business entity?
Obtaining loans or credit is one way out from this position for a small business entity although the decision between obtaining a ‘short-term’ loan or a ‘long-term’ loan remains debatable. However, many analysts agree that, the decision to obtain a loan, especially for funding the operational activities of a small business, should be a ‘short-term’ loan given the nature of its requirement and the relatively small credit requirement.
What is the process behind obtaining a short-term loan?
The arguments against obtaining a short-term loan are its higher interest rate and the pressure that it can put on the small business to meet their targets. However, it is not always the case as obtaining a short-term loan requires careful planning and agreeing on a possible payment plan with the financial institution based on the accounts receivable and the projected income for a particular period. Thus, it is a matter of continuing with the production and work plan for a business entity rather than worrying about paying the loan as if the daily operations go ahead as proposed, the payment plan can be fully adhere to.
How to reap the advantages of a short-term loan?
By obtaining a short-term loan, a small business avoids the necessity to pay different types of loan payments for a lengthy period of time and also avoids the risk of losing fixed assets of the business or of the person, if something goes wrong during this period. A short term loan, usually obtained for a one year period, which can sometimes be extended for 2 – 3 years, avoids these risks. Although it does not provide a large sum of money to develop or fund large scale expansions, short-term loans will ensure the continuous running of a small business without losing its reputation of being efficient, and trust worthy. Furthermore, it can be stated that, a short term loan can motivate a small business to keep going as any disruptions in payment may reflect heavily on its financial statements.
What are the other advantages of obtaining a short-term loan?
As mentioned in the very beginning, a short-term loan will avoid the necessity for the small business to touch its emergency funds which are mostly underfunded due to lack of working capital. At the same time, small scale expansions may also be possible with a short-term loan which adds to the ability of a small business to become a medium scale business entity in a relatively short period of time than being in the same position with the same production or work capacity year after year.
Thus, short-term loans do make a difference to a small business entity and obtaining and utilizing it wisely is the way forward for those who manage such businesses.