If you are considering setting up a business, you may be looking to find ways to finance it. It doesn’t matter whether you are starting a consultancy business, a small shop or if you are doing something specific such as selling Fair-trade African baskets, one of the ways in which you can do that is by applying for a short-term loan.
But in what ways can you use this type of loan for your burgeoning company? Here at Guarantor Loan Comparison, we take a look at the ways it can help.
What is a short-term loan?
First things first, let’s clarify just what exactly is a short-term loan and the ways in which it differs to traditional loans prior to explaining the ways in which it can help build a new company.
Short-term loans are becoming increasingly popular in the UK and work in a similar way to payday loans but the difference is that they are paid back over a longer period, which makes them preferable for many people. If you take out one of these types of loans, it is almost certain you will have to pay interest on the amount you take out.
Other differences between short-day loans and traditional loans include that most lenders will usually offer a much smaller cash sum to an applicant, and the former type of loan is usually considerably easier to be accepted for an application than traditional loans, which tend to have a much more rigorous process in order to decide whether or not someone should be accepted or refused for a loan.
Ways to use a short-term loan to start a business
Make sure you have planned sufficiently
When you are considering getting a short-term loan to help you fund a business it is important that you have drawn up a business plan based on both your sales projections and your budget, This plan should be thoroughly detailed, showing step-by-step how the company will become profitable prior to the loan running out.
To help with cash flow
Starting a brand new business isn’t the easiest things to do, with many founders struggling to set up a company due to the upfront costs involved. One of these includes encountering issues with cash flow when you have first set the business up, as many start-ups experience in the first couple of years of being founded tend to spend more than it earns. A short-term loan can help with any cash flow shortages you experience, enabling you to still be able to pay suppliers and other various expenses that you will have to cover.
To help cover seasonality issues
Certain startups will benefit from having a short-term loan to help with seasonal issues. What we mean by this is that it may be the case that your company is expected to experience a hike in sales at particular times of the year (such as Easter or Christmas) , but then tends to be rather quiet when it comes to sales the rest of it. As a new business, this can make things difficult when it comes to balancing the books through these tough sales periods. This is where short-term loans can significantly help you to get through this period (which may happen to be the exact time you have set up the business) , and enable the company to get through and continue, and you can then pay off the short-term loan through profits that you will receive in the upcoming months.
When you shouldn’t use a short-term loan to help start up a business
Whilst short-term loans can help a startup, they are not the cure to solve every single business related problem, and therefore will not be suitable for every situation when it comes to starting a business.
For example, if you have put together a business plan that appears to strongly suggest that the company will end up being perennially short of capital, a short-term loan is unlikely to help, and you could end up in a situation of spiralling debt. This is because due to the lack of working capital, you may find it harder to pay the loan off in time, which could lead you to feel tempted to take out another loan and then potentially end up in an endless loop of loan taking.
The main thing to remember when it comes to short-term loans is that you should make sure that the reasons that you have decided to get one to start up a business are for financially sound business reasons.