Instead of borrowing money from friends and family, businesses borrow short-term loans from banks or non-banking finance companies. These loans are obtained to help with a short-term capital requirement for a business.
Short-term business loans have a limited term, typically only a few weeks to a year. Depending on the lender, the loan term may be extended by a few years if necessary.
During the loan term, the lender must receive the principal and interest. Because short-term business loans are generally more expensive than long-term ones, interest rates vary depending on the type of loan, the lender, and other factors.
Types Of Short-Term Loans
A line of credit with a predetermined credit limit is one example of a short-term loan. The business can draw on this line of credit as needed. Invoice financing is a different kind of short-term loan that enables companies to use account receivables invoices and obtain a loan from an invoicing company against unpaid invoices.
Payday loans are short-term emergency loans that typically last two to four weeks from the date of borrowing. A lump sum payment of the principal and interest is made on the due date. In exchange for the borrower’s credit facility, the lender gives cash advances to businesses in merchant cash advances.
How To Apply For Short-Term Business Loans
Depending on the lender, the short-term loan application process varies. But you can also apply for a loan offline by filling out a paper copy of the form or online by going to the lender’s website.
The next step is to wait for the lender to contact you and finish the remaining formalities after you’ve submitted the application form and any supporting documents the lender has requested.
Eligibility For Short-Term Loans
It is wise to confirm eligibility before applying for any business loan. This is because each bank has its eligibility requirements. It depends on the profile of the applicant, the type of business, and the company’s needs.
In India, unsecured short-term business loans are the norm. Most banks and NBFCs have stringent eligibility requirements that borrowers must meet to obtain loans because long-term loans lack collateral.
Owning a bank account is one of the prerequisites for receiving a loan. It is easier to be approved for a loan if you have a bank account. Lenders may request the applicant’s bank history to confirm income and determine whether the applicant can repay the loan after managing other business expenses in monthly installments.
To determine the risk of lending, lenders must confirm a company’s cash flow. Opening a bank account might make it simpler to meet the requirements for a loan. Additionally, because most loan providers credit the loan amount directly to the borrower’s bank account, it facilitates disbursement.
The following general requirements must be met to qualify for a short-term business loan:
- Borrower must be a resident of India
- A self-employed individual with a minimum of years of business experience can also apply
- Should be a minimum of 18 years
- Should have proof of business turnover and tax returns of two-three financial years
- Must have a balance sheet of the business to show revenue and cash flows
- Should have a decent credit score
Knowing the eligibility requirements can also give one an idea of the loan amount they are eligible for. The loan amount is determined by business revenue, income tax returns, number of operational years, etc. Loan originators use income data to assess a borrower’s repayment capacity and determine the loan amount. Additionally, it aids lenders in determining whether the income is consistent.
Most banks favor lending to companies with at least a few years of working experience. Although it differs from bank to bank, it typically ranges from six months to three years. It is wise to speak with the bank or look into alternative funding sources to determine your chances of obtaining a business loan.
Lenders only require a promise from borrowers that they will repay their loans. Lenders consider several factors when sanctioning a loan, including the applicant’s profile, business stability, income level, financial history, repayment history, and credit score. It might be more straightforward for borrowers to be approved for a loan if they meet the requirements. Checking the eligibility requirements is therefore advised to prevent disappointment.
Fintitude has a loan eligibility calculator to see where you stand, similar to most banks and NBFCs. You must sign into the Fintitude website and select the loan type you want to apply for to see your eligibility. Next, complete the information as directed to determine how much of a loan you qualify for. Consult with Fintitude experts for the best options.