When to Avoid Short-term Business Loans?

There are certain circumstances where companies should avoid using short-term business loans. For instance:

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• A large loan amount is needed

• Short-term business loans tend to come in smaller amounts (< $100,000), so the borrower won’t be saddled with large payments. This will be an issue for a business requiring a lot of debt.

• A low interest rate is desired or needed

• Interest rates for short-term business loans are usually higher than bank loans or term loans. Companies that want to keep their debt at a low interest rate should avoid short-term business loans.

• A short repayment timeline won’t work

• As the name suggests, short-term business loans have a quick repayment timeline and often times require daily or weekly payments. If that won’t work for a business, then it should not take on a short-term business loan.

• Unable to make payments

• If a business has limited cash reserves, then it should take a deep dive into its finances before borrowing. If it doesn’t have the budget to make its payments, then it should avoid bringing on short-term debt.

• Risk of refinancing repeatedly

• Falling behind on repayment of the loan may create a cycle of refinancing to reduce and delay payments. This can initiate a debt trap where payments exceed what the business can cover and each new loan may contain additional fees.