The loan or borrowings which is acquired for a short period to aid a temporary or personal business monetary requirements is known as a short-term loan. As it is a type of credit, it generally has to be repaid within a period from getting the loan, and it requires repaying the principal amount with interest within the due date. For example, Companies usually borrow short-term loans with the help of bank overdraft to methodize money for working capital needs.

Small businesses or start-ups which are not yet qualified for a credit line from the bank mostly consider short-term loans as an option of great worth. The amount of this type of loan may vary from $100 to as much as $100,000 because these loans generally include lower borrowed amounts. Not only short-term loans are acceptable for business purposes but also for any individual who finds themselves with momentary or unexpected cash flow issues.

One can easily avail all the information about the short-term loan and which one would be the best for them from the site of mercurynews.

There are various types of short term loans, some are mentioned below:-

• Line Of Credit

When a bank or financial institution sets a maximum loan amount that is allowed to be borrowed by an individual, such type of loan is known as Line of credit (LOC). There is an option given to the borrower, either he can draw out the money in a lump sum or installments, but they are not allowed to borrow money beyond the authorized limit because it is governed based on their creditworthiness.

If the borrower wants to withdraw money again he cannot until and unless he has paid off his due principal and interests, once everything is paid then he can again start using the LOC services. This works best for those people who need a regular supply of money.

It is just like the business credit cards just the advantage over the line of credit loan is that it charges a lower Annual Percentage Rate (APR)

• Merchant cash advances

This is a cash advance but it still functions as a loan. Here the borrower receives the loan amount from the lender. The borrower repays the amount to the lender by giving access to his credit facility, which means every time the customer the borrower purchases something, a particular percentage of the purchase made is taken by the lender until the repayment of the loan. This loan is given only applicable to those businesses in which a large credit/debit card sale happens instead of cash sales so that the lender can recover the money from his daily sales.

• Payday loans

These loans are emergency short-term loans that can be easily obtained. It is also given out by high street lenders. In these types of loans, the entire loan amount with the interest must be paid altogether as a lump sum amount when the payday of the borrower arrives.

The borrowing amount is mainly determined based on a particular percentage of the borrower’s income.

Rates in short term loans

According to the debt type, the tenure of the short-term loan varies. The loans may mature within 6-12 months or 1-2 years. The APRs or interest rates are generally high for short-term loans as in these types of loans the adequate profits for the lender are low, so they try to reimburse that with higher interests. People with a low credit score are extended loans with even higher interest rates, which causes a struggle for them to acquire such loans.

How does the Short term loan work?

Short-term loans facilities are rendered by banks, credit unions, suppliers, and financial institutions to those businesses which required immediate funding. The lender goes through the creditworthiness of the loan applicant, then the terms are discussed, the necessary paperwork is completed, and once approved the money is released.