As a small business owner, you must have spent hours researching the best funding options for your company. While there may be many, debt financing indeed features at the top of the list. Before we delve deep into debt financing, let us first try and understand what it means.
By definition, debt financing is any business loan that is used to fund working capital or buy specific assets. The investment could either be short-term or long-term. Whatever be the type of debt financing, the borrower (a small business here) must repay the principal as well as interest on the debt to the lender.
In most cases, small businesses prefer to go for short-term loans instead of long-term debt financing. These loans generally have a maturity of 12-24 months and are helpful to meet an immediate need for funding without a long-term commitment.
Why go for Short-term Debt Financing?
Short-term loans work best for those businesses that are seasonal or even otherwise since they provide a safety net for times when everything isn’t smooth. Even if there are minor obstacles, there’s always a risk of hampering your earnings. In some extreme cases, it could also lead you to shut shop. In such situations, immediate financing is the need of the hour. Most alternative lenders today have a business loan disbursement process that is very easy. The amount is credited into your account within a few working days, subject to the submission of documents on time.
At times, there is a lack of funds due to temporary issues that stall the payrolls and other expenses. You might be awaiting payments from your clients, but remember you also need to pay your bills and how long can you delay? In this case, a short term loan comes in handy to even out your cash flow and ensure regular functioning of your business.
Qualifying for a Short-Term Business Loan
To qualify for a short-term business loan, you need to present correct documents to either your bank or any alternative lender. Some other eligibility criteria vary from lender to lender. Since every business is different, the basis of measuring their creditworthiness cannot be the same. While a CIBIL score of 700+ is essential, several lenders also have their credit evaluation process. The documents required for unsecured business loans are very minimal, and the eligibility is easy to fulfil.
Here are the eligibility criteria to avail a Non-Banking Financial Company business loan:
- Minimum Turnover of INR 10 Lakhs in the last 12 months.
- Last year ITR of more than INR 1.5 Lakhs.
- Either house or business premises should be owned by the business owner.
- The business place should be separate from the residence.
- Business vintage (operations) for at least two years
Documents Required for an NBFC Business Loan:
- PAN card
- Last 9-months bank statement
- Last 2-3 year ITR
- Business place address proof
- Residence address proof
Advantages of Short Term Debt Financing
For entrepreneurs who need quick access to capital, one of the biggest concerns is whether it’s a good idea to go for short-term debt financing. Here are a few advantages that will help you achieve clarity and make that decision today:
Short term debt financing offers low-interest rates and a nominal processing fee, which proves to be a huge advantage. Besides, since small business owners can quickly repay the loan, they avoid the high costs involved in a traditional long-term investment offered by banks or other financial institutions.
Short term debt financing is helpful for those who need quick access to cash. If all the documents are submitted while filling the form, you can receive funds in as little as three days. It is beneficial when you need to plug cash shortages resulting from unexpected expenses or any seasonal fluctuations.
Offers Excellent Flexibility & Reduces Stress
Another added advantage of short term debt financing is that these loans provide great convenience and flexibility. You can apply for a loan online at the click of a button since most alternative lenders have a full-fledged website. Besides, you can choose the repayment tenure based on your needs and comfort – it ranges from 12-24 months. Since you do not have the pressure of owing the lender money for an extended period and adding interest over the years, it keeps your mind free of stress.
Improves Cash Flow
You never know with businesses – today could be bright and sunny, while tomorrow could be super stormy! Seasonal fluctuations happen to the best of us – you can plan as much, but sometimes emergencies wipe away all the hard work. Thanks to short-term debt financing, you can use this ready capital to pay off supplier bills and other additional operational costs. Save for a rainy day, but even if you can’t, don’t stress it out!
Helps you Expand your Business
As a business owner, you would also like to take your company to the next level. You might want to rent a bigger space, purchase additional equipment, or hire more people. There always comes a time when you plan expansion in full force, but a cash crunch may stop you. Whatever plans you may have, additional funding is necessary for growth. With short-term debt financing, you can purchase all that you need and expand your company without any worry!
Improves your Credit History
Short-term loans can help you improve your credit history. Since this type of loan does not have a long repayment period, it’s easier for you to pay back the amount of money you borrowed on time. If you repay it on time, then you can improve your credit history, which can help you get a bigger loan in the future. It’s a win-win for sure!
All in all, short-term debt financing is beneficial for small businesses to operate smoothly. If not for these funds, they can’t buy their inventory, cover working capital shortages, and expand their customer base or operations. As they say, even a little support leads to a big dream – so, take that leap and witness your vision come to life!