The Disadvantages of Short-Term Loans

Short-term loans have been the shortcut to business financing for startups and small business that are in desperate need for business growth. During times of cash shortage, short-term loans have proved effective as it is easier to get and repayable within a short-term period. Even though this type of loan seems easy and is preferable due to its nature, it can also have disadvantages like high cost payment per month, borrowing cycle risk, early repayment penalties, and unsustainability. These disadvantages means that interested individuals should be careful while requesting for short-term financing.

High Cost Loans

Short-term loans always come with a high monthly payment and this can affect business profits as a bigger amount of money is required to pay off the debt, more than what is required from long term loans. It also affects the cost of a project as the short-term loans used for it incur high interest rates. Ensuring that money is budgeted to pay off these short-term loans is vital so as that no negative effect on the business happens. When settling on a business choice, it is critical to evaluate the circumstance, as no two circumstances are precisely similar.

Borrowing-Cycle Risk

Due to this loan being easy to obtain it can turn you to a regular borrower. In the event that repayment of an initial short-term loan is impossible, borrowing again might be considered to balance off the original loan, leading to a series of loans, which traps you and your business in a high-risk borrowing cycle. This risky process leads to inefficiency in businesses operations and it is advisable not to depend on short-term loans seasonally, as it has bad side effects on business productivity.

Early Repayment Penalties

Some lenders impose a contract that limits the repayments of loan at a specific period to profit from the loan. In some cases, repayment of loan at an earlier time than agreed might lead to high repayment penalties as the lender loses profiting due to early repayment. This prepayment penalty compensates the lender and leads to high costs and penalties to the loaneeā€™s credit.

Unsustainable

Dependency on short-term financing is considered bad due to its unsustainability on the long run. Even borrowing from a list of reputable lenders is not good enough. Small businesses or startups are all geared towards making profits from their operations. It is wise to access your business operations if you find yourself constantly taking loans to cover business expenses. If your business is not being productive it would be best to find other business opportunities other than taking short term loans.

At the end of the day, the decision rests on you to decide which direction your business takes when it comes to financing for business growth. Short term loans or long term loans also has its advantages but thorough assessment of business direction and determination of what is required for business growth and improvement will help guide you on the quest to a successful business operation and increased productivity.