A loan refers to an amount of money provided by an entity, individual or organization to another entity, individual or organization at an interest rate.
It is recorded on a promissory note which specifies the principal amount of money borrowed, the interest rate charged by the lender and repayment date, among other things.
Loans can be categorized as long-term or short-term depending on the repayment period.
Short term loans refer to borrowed funds that are repaid within a short time span. Short-term loans mature faster than regular loans. That means the borrower receives funds from the lender more quickly and is expected to repay within a shorter time frame.
Examples of short-term loans
This is a type of short-term borrowing common for many individuals and small businesses. Here, the buyer purchases goods and services using a payment card provided that the total charge of the transaction does not exceed the maximum credit limit of the card.
In this case, the credit card company pays the supplier and the buyer in turn pays the credit card company.
Payday loans or payday advance refers to short-term unsecured loans (meaning they do not have any collateral attached to them) meant to finance people as they wait for their next payday. There is interest for this type of loan. People often use online payday loans which require immediate attention and their next paychecks are still several weeks away.
Therefore, this type of loan requires borrowers to have records of payroll and employment to ensure sure they have the means to pay up on their next payday.
Overdraft refers to a financial facility provided by the bank where its customers can withdraw more money than what is available in their bank accounts.
Borrowers cannot, however, withdraw any amount as he likes as there is a bank overdraft limit that he should not exceed. The borrower has to agree to pay the interest which is imposed on the overdraft at an agreed rate.
Short-term personal loans
This refers to relatively small amounts of funds borrowed from the bank to consolidate credit cards or to start a business. A personal loan does not require any collateral and therefore it is considered an unsecured loan.
Personal loans have loan limits and interest rates which are basically based on the borrower’s credit rating.
Short-term business loans
These are financial funds given to businesses to help them pay their suppliers, raise working capital or cover accounts payable within a shorter period of time.
Short-term business loans are unsecured and this means that they do not require collateral and the bank checks the borrower’s credit history and credit score before issuing the loan. Borrowers can access various kinds of business loans such as trade credit, credit loans, and bank overdrafts.
Why Use Short-Term Loans
Despite the high-interest rates of most short-term loans, a short-term borrower has lots to benefit from this type of borrowing.
No collateral required
Many short-term loans do not require collateral. This is a relief for the borrower since he does not have to put his property at risk in case of a failure to repay the loan on time.
They are fast
The most common advantage of short-term loans is the speed involved in processing the loan required by the borrower. Unlike long-term financing, short-term loans provide borrowers with the money much faster, hence helping solve their emergencies or immediate needs.
Shorter repayment time
Short-term loans let the borrower get his funds faster. However, it is also expected that the borrower repays the debt within a shorter period of time.
This means the borrower can quickly repay his short-term loan and be rid of the burden of having to keep servicing the loan over a long period of time.
They provide the required working capital
Many businesses take up short-term loans to cater for day-to-day operations of the business.
Short-term loans come in handy when business revenue falls below the operations expenses. Therefore short-term loans ensure that funds are readily available to meet business expenses.