All You Need to Know About Short-Term Business Loans in India

Running a business comes with many challenges, and access to immediate funds is often critical for maintaining smooth operations. Whether you’re dealing with an emergency expense, managing seasonal dips in cash flow, or taking advantage of a growth opportunity, short-term business loans can be the ideal solution to your funding needs.

In this guide, we’ll break down everything you need to know about short-term business loans, including their features, types, and application process. Let’s dive in!

What Is a Short-Term Business Loan?

A short-term business loan, also known as a working capital loan, is a financial solution designed to provide businesses with quick access to funds. These loans are intended to cover immediate needs like purchasing inventory, repairing equipment, or managing operational costs.

Short-term business loans are typically repaid over a shorter period, ranging from 3 months to 3 years. The loan amount is usually disbursed in a lump sum, with fixed monthly payments throughout the repayment period. While the loan’s short tenure means higher monthly payments, the interest rates tend to be lower than long-term loans, making them a practical option for businesses in need of quick cash.

Interest Rate:

Short term Business Loans interest rates vary from lender to lender and also depend on the type of loan one takes. The Annual Percentage Rate (APR) in such loans can be as low as 3% and can go up to 150%. It entirely depends on the nature of the short term loan you take.

Key Features of Short-Term Business Loans

• Quick Disbursal: One of the most significant advantages of short-term loans is the speed at which funds are disbursed. Once approved, businesses can receive the loan amount within days.
• Simple Eligibility Criteria: Both salaried individuals and self-employed professionals can apply for short-term loans, as long as they meet the lender’s basic requirements.
• Paperless Application: Many lenders offer a fully digital application process, making it easier for businesses to apply and receive funds without the need for extensive paperwork.
• Customizable Loan Terms: Borrowers have the flexibility to choose their loan amount and repayment tenure, typically up to 12 months, based on their business needs.
• Higher Interest Rates but Lower Total Interest Cost: Since the loan is repaid over a shorter period, the total interest cost is often lower than long-term loans, despite higher interest rates.

Types of Short-Term Business Loans

There are several types of short-term loans available, each with its own set of benefits. Here are the five most common types:

1. Line of Credit

A line of credit is a flexible loan option that provides businesses with access to a pre-approved amount of funds. Businesses can draw on the funds as needed, and no monthly payments are due until the credit line is used. This option is ideal for businesses with fluctuating cash flow needs.

2. Invoice Discounting

Invoice discounting allows businesses to raise funds by using their unpaid invoices as collateral. Lenders provide a loan based on a percentage of the invoice’s value, and businesses repay the loan once their customers settle the invoices. This option helps businesses manage cash flow by converting pending payments into immediate cash.

3. Invoice Factoring

Similar to invoice discounting, invoice factoring involves selling unpaid invoices to a third-party company. The business receives an upfront payment (typically 70-90% of the invoice value), and the factoring company collects the payment from the customers. Invoice factoring helps businesses access immediate funds without taking on additional debt.

4. Vendor Financing

Also known as trade credit, vendor financing allows businesses to purchase products or services from suppliers and defer payment until a later date. This type of financing helps businesses manage cash flow and allows them to convert inventory purchases into sales before having to pay the supplier.

5. Business Credit Cards

Business credit cards are a convenient way to cover day-to-day expenses while earning rewards like cash back and bonus points. They offer flexibility in managing smaller expenses but require prompt repayment to avoid high interest rates and fees.

Reasons to Consider a Short-Term Business Loan

Businesses may choose a short-term loan for various reasons, including:

Handling Emergency Expenses

If an unexpected event, such as a major equipment failure or a natural disaster, impacts your business, a short-term loan can provide the funds needed to cover repairs or replacement costs.

Managing Seasonal Cash Flow

Many businesses experience fluctuations in revenue based on the season. Short-term loans help bridge the gap during slower periods, ensuring that your business has enough cash on hand to cover operating expenses.

Seizing New Opportunities

A short-term loan can help you take advantage of growth opportunities, such as purchasing inventory in bulk at a discount or hiring new staff to service a large client.

Financing with Bad Credit

For businesses with less-than-perfect credit, short-term loans offer more lenient eligibility requirements, providing a way to secure funds despite past financial challenges.

How to Apply for a Short-Term Business Loan

The application process for a short-term business loan is usually straightforward and involves the following steps:

1. Research and Compare Lenders

Start by comparing lenders based on factors like interest rates, loan terms, and customer reviews. Different lenders offer varying terms, so it’s essential to find one that suits your business’s needs.

2. Gather the Necessary Documents

Prepare all the required documents, including business registration certificates, financial statements, bank statements, and identity proofs of the business’s promoters.

3. Submit Your Application

Complete the loan application, either online or in person, and submit it along with the necessary documents. Many lenders now offer a fully digital application process, streamlining the procedure.

4. Loan Evaluation and Approval

Once your application is submitted, the lender will review your financials and assess your repayment capability. Upon approval, the loan terms will be communicated to you.

5. Disbursement of Funds

Once approved, the funds will be disbursed into your business’s bank account, often within just a few business days.

Eligibility Criteria for Short-Term Business Loans

Eligibility requirements for short-term business loans may vary by lender, but the following criteria are typically considered:

• Creditworthiness: Your business’s credit score plays a significant role in determining your eligibility and the loan amount you can receive.
• Financial Documents: Lenders may require financial statements, tax returns, and other documents to assess your business’s financial health.
• KYC Documents: Lenders will request identity and address proof for the business and its promoters.

Using a Short-Term Business Loan Calculator

To determine the most affordable loan option for your business, consider using a short-term business loan calculator. By inputting factors such as the loan amount, interest rate, and repayment tenure, you can calculate your monthly payments and compare different loan options.

Choose Credlix for Your Working Capital Needs

At Credlix, we specialize in providing businesses with quick access to working capital through bill discounting services. With our platform, businesses can access funds within 24-72 hours, ensuring that they have the cash flow necessary to keep operations running smoothly.
By leveraging unpaid invoices, businesses can secure immediate financing and avoid taking on debt. Whether you’re facing a cash flow gap or looking to fund a new project, Credlix offers a convenient and efficient solution to meet your business’s short-term financing needs.