Short term loans are debts that a company needs to pay back within a year. Bridge loans and credit card bills of a company can be considered as short term loans. The nature of the short-term loan differs from the traditional loan in terms of repaying time, approval time, approval procedure, a credit score of the borrower etc. The short term loan appears on the liability side of the balance sheet. It is one of the key factors which determines the financial health of an organization.
Why are Short term loans needed?
One of the examples where a company needs a short loan is when a company is running in short of cash flow due to blocked investments in other operations, and if they want to increase the cash flow to provide salary to the employees, the short-term loans could be fruitful. It is expected that within a year the blocked investment could generate cash flow. Meanwhile, the short-term loan could be used for the operational purposes of the company. The company could also use the credit card to pay back suppliers on time to maintain the good relationship with suppliers.
A bridge loan is a loan which bridges the borrower with the short-term debts with instant cash. It is usually less than a year’s term. When you are turned out by a bank for long term loans and ruled out of options, to keep the operations running with cash flow, bridge loans could be used. Because of the high risk involved and the short time nature of the loan, the interest rates are always high. The other terms known for bridge loans are swing loans, gap financing or interim financing.
Difference between Short term and Long term loans
Short term loans usually have a quicker application, verification, lean approval process so that the customer gets the funding quickly than the traditional loans. But, as a cost for the convenience, usually, the short term loans have high interest, short repaying time and processing costs are too high in comparison to the traditional loans. Usually, business tends to go for the short term loans because of the accessibility to quick and convenient access to cash. Businesses are ready to pay more interest rates for short term loans as they are well aware that the debt is a short term one and they plan to repay it with long-term financing, low interest as soon as possible. And also most of the short term loans don’t have penalties for the repayment.