Financial Planning

There is no denying to the importance of the short term loans in the business world. They may seem to be more costly than the long term loans but since these come for a short duration of time, overall cost is often lesser.

I don’t mean the short term loans are better than the long term ones; both score over each other in different circumstances. It is only the type of need that decides which type of loan is better.

Let us understand the merits and demerits of short term loans, also called Bridging loans. This is very effective in understanding the ways to get the maximum benefits from it and also avoid any possible damages from it.

Merits Short Term Finance:

These are economical: The most important thing with these loans is that these can be arranged at a very short notice. Sometimes there is an immediate need to which short term loans or finance is an answer. These don’t incur any raising cost to the company which makes these economical. They rate of interest may seen higher but is relatively economical as compared to the long term finance.

These loans don’t interfere with management processes: The management retains the decision making authority. There is absolutely no interference from the money lenders.

These show good flexibility: These loans can be immediately paid back, if you don’t need these. Such loans can be raised anytime. All this gives these a great flexibility.

Apart from short term, these serve long term purpose as well: Some of the sources of these loans provide renewing options as well. For example, Cash credit which is mostly given to for a period of one year, can e extended to upto tree years.

Demerits Short Term Finance:

The top demerits of short term finance are:

• The rate of interest, like any other loan, has to be paid even if you are at loss.

• It makes the fixed asset unavailable for security to get any other loan. It charges the fixed asset.

• These are difficult to get encase business suffers consistent losses.

• These loans also come with a bit of uncertainty especially in crisis.

• The legal formalities like prior security, transfer deed etc. make these quite difficult.

I personally would advise you to carefully examine the conditions, need, terms and conditions and the reliability of expected income etc. before opting for the short term finance.