The greatest challenge that businesses face is the lag between the incurring of expenses and the receipt of income. This lag causes crunches in cash flows, which most small or new businesses find extremely challenging to manage. Here’s where short term financing comes to the rescue, providing much-needed liquidity to run day-to-day operations of a business.
Short-term financing is a form of debt finance that is most appropriate for businesses that require funds for their working capital needs. In fact, short loans are perfect for businesses that are cyclical in nature. Mostly, those loans that have a repayment period of 12 months or less fall under the category of short term loans.
Too Many Hurdles
Traditionally, businesses have turned towards banks to secure external finances. Even the SME (small and medium enterprises) segment and new entrepreneurs flock to banks in an effort to fund their operations, execute orders and invest in growth. However, short-term financing from traditional banks poses great challenges for SMEs. To begin with, most traditional banks have extremely stringent eligibility criteria for loans. Most products require businesses to offer some collateral, which smaller units may not have. Moreover, their loans are typically ill-suited for the specific requirements and stages the life cycle of the business.
The most significant aspect is that traditional financing institutions take months to process and disburse a loan, while most small businesses have an urgent requirement of funds.
India Finds a Solution
India has always been quick in adopting technology. By the end of 2015, India already had 350 million internet users. India’s internet user base, which is currently second only to China, would continue to be the fastest growing economy in the world, says a report published by Nasscom. In fact, by 2020, the country is expected to have 730 million internet users. Given this scenario, it was only natural for short term loans to become available online.
While the high and growing internet penetration has been a supporting factor, what has revolutionized the short-term lending space in India has been the meteoric rise of FinTech firms. These firms make use of cutting-edge technology to smoothen the process of loan application, approval, disbursement and repayment. Consequently, an increasing number of businesses are turning towards short-term loans online to meet their financing needs.
No doubt online loans are simpler to apply for and easier to get disbursed. However, SMEs and new entrepreneurs need to ensure that their businesses get the most appropriate solution available. Here are four steps that would help you do just that.
Steps to Protect Your Business When Opting for a Short-Term Loan Online
Step 1: Make an Appropriate Estimate of the Funds Needed and the Purpose: This is possibly the most important step. It is critical for a business to make its projection of fund requirement as accurate as possible. While an overestimation would mean higher interest payouts, an underestimation could result in ongoing liquidity issues. The former impacts the company’s profitability and the latter may result in the inability to fulfil an order or complete a project execution.
Step 2: Identify Short-Term Requirements:
It’s important to remember that short term financing is not suitable for funding long-term capital investments. The due date for the repayment of short-term loans would not give enough time for a business to generate returns from its capital expenses. Using such loans for longer-term investments (like in machinery or real estate) could worsen the liquidity problem in the near term. Short term funding is ideal for filling gaps arising from cyclical sales, seasonality or credit extended to customers after an invoice is generated.
Step 3: Choose the Best Lender:
While many companies may provide short term loans online, one must be discerning when choosing the lender. Since most FinTech firms have sprung in the last couple of years, one can look into the credibility of the management team and the amount of funding the firm has raised. Check if the lender promises complete transparency into fees and charges and whether the firm has associations with credit card and PoS (point-of-sale) companies. Also, do remember to check whether the lender allows prepayment of loans. This is a great feature since it enables a business to save on interest payouts in case the loan can be cleared sooner than the maturity period.
Step 4: Choose the right loan product:
Backed by ultra-modern technology, FinTech lenders are able to offer a wide range of products suited for unique purposes. These financial products are also tailored to the payment cycles of small businesses. For instance, there can be a loan specifically for businesses that sell products on different marketplaces. The repayment of this short term loan would be linked to the sales and income of the business from the different marketplaces. Similarly, if a business receives payments via credit cards and PoS machines, the repayment of the loan may be linked to these. Moreover, there are products that offer a revolving line of credit. Thus, it is important to thoroughly check the features of the financial product before making the decision of taking a loan.
Therefore, any business seeking a short-term loan online would have many choices to make. A good source of external funds can help the business grow. It’s the lack of awareness of the available options that affects a business. In order to protect your business, you need to plan ahead, estimate liquidity requirements, identify the lender and the short-term financing product that best suits your business. In the absence of these four critical steps, a business would not be able to leverage all the benefits of short loans.