Short-term loans are much easier to get than traditional bank loans especially if you have bad credit. Just because you are eligible for a loan doesn’t mean you should take it. Every business experiences cash-flow issues and short-term loans offer an easy way out. There are a few instances where taking such a loan might be a bad business move on your part.
You Can’t Repay the Loan Yourself
One of the attractive features of a short-term loan is you don’t need collateral to get a loan. The lender still needs some assurance that he will get his money back if your business or company can’t repay the loan. In most cases, you have to agree to pay the loan yourself in the event that your company can’t handle the payments. This scenario puts your personal finances at risk so make sure that this is the best solution for you before you agree on the terms.
You Don’t Have Money in Your Business Account
Related to the previous point; you need to be able to repay the loan if you decide that a short-term loan is the best solution. Make sure that you have enough money in your account to repay the loan. Late fees and penalties can add a significant amount on your repayment and easily put you in a dire financial situation. Think carefully about how you are going to repay the loan and choose terms that make the most sense based on your financial situation.
You Can’t Handle High Fees and Interest
Short-term loans are quick, easy and convenient but it is no secret that they attract large interest rates and fees. If you are uncomfortable with paying high interest, you are better off looking for other alternatives for your financing. Also make sure that you are aware of all the fees including service fees, origination fees, late fees, insufficient funds penalties and prepayment penalties. All these fees can easily add up and make the loan a lot more expensive than you previously thought.
Better yet, find a reputable direct lender who charges minimal fees and is upfront about everything you are expected to pay before, during and after the loan.
You Have Unreliable Clients
Finally, consider a short-term loan very carefully if your clients have a history of defaulting on payments or late payments. The loan company won’t wait until your clients pay you. You need to be very confident about your cash flow projections and your ability to meet your obligations before you sign on the dotted line.
Although short-term loans are a great financing option if you need money immediately or have poor credit, it is not always the first choice or even a good idea to begin with. Think through these points carefully before you decide to take out a short-term loan.