Financial necessities are hard to predict. Especially so in the case of business owners. Money is vital for all steps involved in running a business, from inventory acquisition to sales. Being short of capital might sometimes lead to unforeseen complications. What would you do if you needed to gather funds for your business on short notice?
In this article, let us discuss the various types of short-term loans that you could give aid in case of such financial urgencies.
What are short term loans?
Short term loans are funds borrowed to meet financial obligations within the short span of a few days to one year. In the case of short-term loans, one receives cash sooner when compared to medium and long-term loans. The time given to repay such loans is also shorter.
What are the different types of short term loans?
This is a straightforward and convenient financial service offered by banking institutions. An overdraft is a deficit which occurs when one withdraws more money than a bank account contains. In such a situation, the bank account is said to be ‘overdrawn.’ The amount withdrawn should be within the stated overdraft limit.
The account provider and the account holder may come to an agreement to set the interest rate of overdrafts.
2. Credit Card:
This is a mode of payment in which the cardholder uses the card to buy goods and services with the promise of paying back for them. Using a credit card creates credit instantly when the holder makes a buy or payment.
As long as he does not exceed the credit limit, he can make payments conveniently without having to worry about the balance available, as in the case of a debit card. For smaller businesses, financing via credit card is an easy and viable option.
3. Payday Loans:
Also known as payday advances, a payday loan is a short-term loan issued without any collateral. The process involved is the issuance of a small, unsecured loan for a short period to be repaid on the borrower’s next payday. These loans can be called ‘cash advances.’ Usually, some verification of employment or income is involved (via salary slips and bank statements), but some lenders may not insist.
If you are in urgent need of cash and have complete confidence in your ability to repay it, Payday Installment Loans are a sure blessing.
4. Money Market:
In short, money marketing involves trading short-term loans between banks and other financial institutions. Interbank lending, repurchase agreements, and other short-term financial instruments comprise the core of the money market. In a money market, there are typically two kinds of people: people with surplus funds, and those in urgent need of credit.
Money marketing transactions are often wholesale, i.e., they involve the transfer of large denominations between financial institutions and companies, and not between individuals.
5. Refund Anticipation Loan (RAL):
This is a short-term consumer loan that allows customers to borrow against their tax returns. Instead of waiting for tax refunds, those in urgent need of cash can borrow money with the promise of paying back as soon as they receive their tax refund. Paid bodies like some professional tax preparation services help customers in applying for refund anticipation loans.
6. Bridge Loans:
This is a type of short-term loan taken for a period of 2 weeks 3 years while the borrower arranges for larger or longer-term financing. The borrower is allowed to arrange for immediate money before his long-term loan gets sanctioned. Once the longer term loan gets issued, the borrower can use the cash to repay the bridge loan and to meet his other capitalization needs.
Bridge loans have higher interest rates than the conventional sources to compensate for the more risk involved. The lender may also be required to give cross-collaterals. The up-side to bridge loans is that they can be arranged instantly and with little documentation.
When one is in need of quick cash, and completely confident in your ability to repay, these short-term loans come in extremely handy.
However, each of the above-mentioned short-term loans comes with a unique set of legal obligations and risks. It is imperative that as the borrower, you go through the terms and conditions with great caution, before taking any major decision.