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Advantages And Disadvantages Of Short Term Loans

There are many new ways of meeting our financial needs these days. With highly increased spending levels, people are not hesitating to buy debts from leading banks or lenders of other types to make their lives comfortable.
Few borrow with complete hope and courage to re-payback since they might need it for an emergency and the money they have invested in might mature a little late. But, there are few others, who lamely borrow money, and finally get into bankruptcy by paying too much of interest fees, no paying them in time, losing their credibility and finally landing in troubles.
Short term loans are the new trend and they are sometimes pretty good too. These short term loans are a good way of gaining funds required for your emergency needs, which you can pay back in a year or less.
It’s an easy way for companies to get a constant cash flow, if they fall short of it, and can repay once they get their due payments. While this is pretty common for businessmen of large companies, small scale companies are a prey to this.
These short term loans are covered under Overdrafts, trade credit cards and short term loans.
Here are some advantages and disadvantages of these loans:
Speed:
Applying for a bank loan will definitely take time, at least a minimum of 3-5 working –days! Can your utilities or other dealers wait until then? Then how do you continue your business? This is the main advantage here, short term loans are processed faster than any other type of loans.
Lenders don’t make too many verifications of any company or individual when applied for short term loans. In the opposite case, there is thorough verification for a long term loan. Small companies might not have enough reserves to run the business, and during these times they can apply for such short term loans. Through this, they needn’t worry about stopping their business for a day and incur the losses. They needn’t go for high-interest rates and untrustworthy sources for money.
Disadvantage:
Small scale companies or individuals are very much vulnerable to sudden bankruptcies and due to this, they might fall short to pay the amount on time.

Flexibility:
Business is always with lots of ups and downs, even for individuals. Small scale companies are especially the main targets of such crisis. They will have seasonal variations in cash flow and they need money or cash to overcome that phase.
Overdrafts are one such short-term financing options available to people when taken in a proper way, this can be very beneficial. These are lending by banks for companies to pay their electronic debts, and cash withdrawals to a certain level.
These are with a charge, called as fee or interest. For short term, this is less, while for the long term the charges itself will add up to the existing debts.
Disadvantage: the bank or the lenders may withdraw this scheme without any prior notice and you may have to repay ASAP.
Management:
The short term loans or loan givers doesn’t have any stake or any role in the company managements.
While on the other hand, the long-term loan givers have a role in the company managements, like the salary scale of employees, companies investments types, other loans and caps on many other decisions, which might restrict the business and its decisions might alter the course.
Risk:
Short term loans when paid back in time, definitely offers good opportunities to utilize when in need. But at the same time, they are extremely risky if you don’t pay back and plan for the same. The short term loans may be a high-cost capital to the smaller company and will eventually lead to the fall of the company going bankrupt.
Trade credit:
This is a type of loan given in buying raw materials for the company and paying at a later date. This might offer a good catch to the consumer, but eventually, it will wipe out any discount the company might offer when taken on direct cash. This too doesn’t come for free; you have to cough up to 2-8% of the amount you have taken as a service charge.
Before opting for this short term loans, please re-revise your decision.

  • Can you really pay back on time?
  • What’s the alternative option of payment?
  • What’s the alternative for this loan?
  • How can you avoid this trap?

Think about all this and then go in for such loans, because once you sign for it, ultimately you have to pay!

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