What are the advantages and disadvantages of short-term financing for companies?

New companies often need money quickly, with which to pay their workers, buy work materials, etc. This is because, in the beginning, you will not have enough customers to cover your expenses , so this is why you have to resort to short-term financing. Which is a loan made by a financial institution. These types of loans are similar to micro credits . Your time to cancel it can be up to 2 months.

The interests of this type of loan in most cases are low , and for small amounts of money. Despite having advantages such as helping us out while we start, they can have some disadvantages. But that’s what we are here for today, to mention and explain What are the advantages and disadvantages of short-term financing for companies?

Advantages of short-term financing for companies

As we mentioned before, a small company may not have enough income at the beginning, which makes it resort to a short-term loan , which helps cover these expenses, in addition to its low interest rate in this type of loan, the The company can get resources quickly while being safe in an emergency and it is easy to get for small companies . We will talk about other advantages that short-term financing offers companies.

Helps fill the cash gap

The first months of a company are accompanied by little sales and little profit in the same, this because it is when the company has to make itself known, apply its marketing strategy and others, for this, with short-term financing it helps us to cover the expenses that cost us in our first months .

Easier to opt for in small businesses

It is a type of credit that is easier to get for companies, since they are the ones that need it the most, usually small and medium-sized companies use this type of loan . Although there are cases where large companies resort to this financing, but it is not common.

Interest rates are lower

Especially in these loans, the interest rate is low than, in others, giving a greater versatility of operation to businesses, this thanks to the fact that it does not have such high interests.

Disadvantages of short-term financing for companies

We have already seen the advantages of this type of financing, which helps us to start our business, but there are disadvantages that we must know about this type of financing. A factor that is not at all advantageous is the interest that increases the debt of the company , the more disadvantages we have. Now we will mention some of them.

Increased interest

This is one of the main disadvantages of requesting a short-term loan , although the interests are lower than other loans, it still represents an increase that becomes part of the company’s debt. Before requesting short-term financing, the business strategy must take this aspect into account.

It is not the most suitable option for companies in debt

It is expensive to start a company, and no matter how stable it is started, in most cases there is a debt acquired with the creation of a new company , which will be canceled over time. Now, should a company in debt ask for short-term financing? the answer is no. As we mentioned in the previous point, the increase in interest generates a greater debt , and if we have a debt from before, what it can do is bring with it a default by the company.

 

by Abdullah Sam
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