Top 6 Types of Short-term Business Loans Every Business Owner Should Know About

Small business owners with no credit history and no proven track record of business existence may not qualify for long-term business loans. Regardless of your business size and requirement, businesses might need help with sudden cash flow problems. In such a scenario opting for a short-term business loan is one of the most sought-after options. You can avail of this loan from any financial institution to raise funds and handle short-term financial challenges. 

So, while planning to set up a new business or expand the existing one, opting for a short-term business loan for funding can be helpful. Now, there are various options that you can choose from, depending on your need and preference.

Here is a list of top short-term business loans you can avail of for your small business. 

Short-Term Business Loan: What is it?

Short-term business loans are a financing option that caters to immediate or short-term business requirements effectively. You can get these loans to cover any immediate business expenditure, like meeting basic operation costs, monthly capital requirements, expanding the existing business premises, and many more. 

Short-term business loans come with shorter repayment, ranging from 1 to 3 years.

Although short-term business interest rates might be higher, it significantly depends on your loan amount, security and repayment tenure. Before applying for one, comparing the interest rates offered by different financial institutions and finding a loan offer that suits your repayment capabilities is recommended.  

Types of Short-Term Business Loans Every Business Should Know

Before availing of a short-term business loan, it is wise to familiarise yourself with the different types of these loans in detail. Here is the list of the 6 most popular types of short-term loans so that you can make an informed decision. 

1. Bank Overdraft

It is a short-term financing option with a credit facility where the current account holder can withdraw excess money over the amount present in their account. However, banks offer an overdraft limit within which you can withdraw the amount. So a bank overdraft is handy if you need to fulfil any urgent cash requirement. With a limited amount of paperwork and no requirement for collateral, it is the ideal option for managing short-term business requirements.

Although the bank does not impose a high-interest rate, it is necessary to be cautious about the additional charges like fees per withdrawal, often attached to such a facility.

2. Mudra Loan Scheme

The Government of India launched Mudra or Micro Units Development and Refinery Agency Ltd loan scheme under Pradhan Mantri Mudra Yojna to financially support small-scale businesses. Financial institutions like commercial banks, Small Finance Banks, RRBs, MFIs, and NBFCs provide this loan. Accordingly, you can approach any of the lending institutions. Under this scheme, you can avail of business loans ranging from ₹50,000 to ₹10 lakhs depending on the Tarun, Kishor, and Shishu categories. 

For instance, in the Tarun category, you can get a business loan of up to ₹10 lakhs for setting up or expanding your business. In the Kishor category, you can get loans starting from ₹50000 to ₹5 lakhs. Simultaneously in the Shishu category, you can get a business loan of up to ₹50,000 for your startup phase business.  

3. Demand Loans

It is one of the popular financial solutions available in the market, where you can pledge your tangible asset as collateral in exchange for demand loans from lenders or unsecured loans. A demand loan is a type of financial instrument with no specific set tenure and can be repaid at any time. This means you are free to repay the loan amount without having to worry about incurring prepayment penalties. 

It is usually designed to cater to your short-term business requirements like purchasing new or modern machinery, maintaining working capital, paying employees salaries, covering workplace rent, and many more. It is important to note that lenders generally offer this kind of loan if you are among the creditworthy borrowers.

4. Bridge Loans

While running a business, there can be scenarios where you might fail to offer loan collateral. In such a scenario, you opt for a bridge loan to fulfil the gap between short-term cash requirements and long-term loans.

In India, this type of loan is mainly seen in the real estate sector, providing money to the business owner to start a new project.

5. Trade Credit

It is a type of credit card for business, where you can use the money on your account for selling goods, manufacturing, etc., without making immediate cash or cheque payments. This arrangement is quite helpful for businesses as it puts less pressure on cash flow.

You can repay the depending on the amount by paying out monthly instalments or EMI. The final EMI is calculated by adding up the interest rate with the total amount spent. 

6. Personal Loans

This is a type of unsecured loan and, at times, frequently chosen due to its quick disbursal and minimal documentation. In certain cases, you can apply for personal loans for business. For instance, if you need funds due to a temporary shortfall in money and cannot afford to wait, opting for a personal loan is a viable option. Lenders offer personal loans depending on your and your company’s credit history, income level, etc. 

So, if you do not have collateral to offer as security, you can apply for a personal loan to fulfil your business’s financial needs.  

What are The Benefits of Short-term Business Loans?

Many business owners prefer a short-term loan as it comes with many benefits. Some of these include:

• One of the notable advantages of short-term business loans is that you can easily access money with minimal documentation. In India, there are various short-term loan providers with easy lending norms.
• Getting this type of business loan can help improve your credit score. The loans can be repaid without any hassle through EMIs.
• Another notable advantage of using business loans is the flexibility it offers. You can use the funds however it pleases without any restriction.

Final Words

Due to its easy application process and fast processing, the need for short-term business loans is growing massively. Short-term business loans like bank overdrafts, bridge loans, trade credit, etc., are ideal for businesses that need immediate funds to clear the operational costs and overhead expenses. 

FAQs

Q1. Can I get a short-term business loan online?

Ans. In the era of digitalisation, you can apply for a short-term business loan online. They are relatively convenient and hassle-free. Many banks and NBFCs offer online business loans today. 

Q2. What is the interest rate for a short-term business loan?

Ans. The percentage of interest varies from lender to lender. So, check your lender’s website before applying for a loan. 

Q3. Which is a better option for business- a short-term business loan or a long-term business loan?

Ans. Whether you should choose between short-term and long-term business loans solely depends on your financial requirement and urgency. This type of business loan comes with an easier and faster processing rate than long-term business loans.