New companies often need money quickly, with which to pay their workers, buy work materials, etc. This is because, in the beginning, you will not have enough clients to cover your expenses, so that is why you have to resort to short-term financing. Which is a loan made by a financial institution. These types of loans are similar to microcredits. Your time to cancel it can be a maximum of 2 months.
The interests of this type of loan in most cases are low, and for small amounts of money. Despite having advantages such as giving us a hand while we start, they can have some disadvantages. But that is why we are here today, to mention and explain what are the advantages and disadvantages of short-term financing for companies?
Advantages of short-term financing for companies
As we mentioned before, a small company may not have enough income at the beginning, which makes it resort to a short-term loan, which helps cover these expenses, in addition to the fact that its interest rate is low in this type of loan, the company can quickly obtain resources while being safe in an emergency and it is easy to obtain for small companies. We will talk about other advantages that short-term financing offers companies.
Helps to cover the cash deficit
The first few months of a company are accompanied by little sales and little profit in it, this is because it is when the company has to make itself known, apply its marketing strategy and others, for this reason, with short-term financing it helps us to cover the expenses that cost us in our first months.
Easier to opt into small businesses
It is an easier type of credit to obtain for companies, and it is because they are the ones that need it the most, in general, small and medium-sized companies resort to this type of loan. Although there are cases where large companies resort to this financing, but it is not common.
Interest rates are lower
Especially in these loans, the interest rate is lower than in others, giving businesses greater operating versatility, thanks to the fact that they do not have such high interest rates.
Disadvantages of short-term financing for companies
We have already seen the advantages of this type of financing, which helps us to start our business, but there are disadvantages that we have to know about this type of financing. A factor that is not at all advantageous is the interest that increases the company’s debt, among the more disadvantages we have. Now we will mention some of them.
The increase in interest
This is one of the main disadvantages of requesting a short-term loan, although the interest is lower than other loans, it still represents an increase that becomes part of the company’s debt. Before requesting short-term financing, this aspect must be taken into account in the business strategy.
Not the most suitable option for indebted companies
It is expensive to start a company, and no matter how stable it starts, in most cases there is a debt acquired with the creation of a new company, which will be canceled over time. Now, should a company in debt ask for short-term financing? the answer is no. As we mentioned in the previous point, the increase in interest generates a greater debt, and if we have a debt from before, what this can do is bring with it a default by the company.