How do short term loans work?

There are times when people run out of money in the middle of a month and require an alternative amount until they receive their next pay. Of course, in such a scenario, you can’t consider long term loans since the amount is too small and the duration is very short. So, that’s where short term loans come into play.

The standout feature of short term loans is their speedy disbursal. Unlike other loans, the process is not short, and the requirements don’t follow an exhaustive list either. No applicant could be considered an ideal choice for short term loans unless he masters how this financing option works.

Going through the following explanation will certainly add significantly to your knowledge:


  • Eligibility for short term loans

Some people tend to oversimplify taking a payday loan, but lenders have a typical criterion to select an ideal borrower. Obviously, no lender would risk giving away his money to an irresponsible person. The important features of their criteria are as follows:

  • Credit check: You might have seen boards with “loans, no credit check” around your city. Trust me; this slogan does not take your credit score entirely out of the equation. The reason is not difficult to understand. It is the most authentic way for a lender to assess how well you handled the previous loans. At the same time, some people have never taken a loan and therefore don’t have a credit history. Lenders peek inside their social media accounts to determine their creditworthiness.
  • Age factor: some lenders have set a standard age – between 21 to 55. Anybody not fulfilling this requirement is immediately out of the race.
  • Income: The last and most crucial qualification hurdle is your income. Though the threshold of income varies from lender to lender, they will give a detailed look at your cash flow to know whether you can afford the asked amount or not. So, don’t try to fool your lender by filling the application of a more significant amount than what you can manage.


  • Affordability of short term loans

There is no restriction on the number of short terms loans you want to avail. But to be on the safe side, it is recommended that you should not proceed with multiple short loans at a single time due to their affordability. Taking the following aspects for granted can land you in great peril:

  • Rates: cash flow loans are not backed by any collateral asset, which means the element of risk is apparently bigger for lenders. As a result, lenders charge a hefty interest rate – generally beginning from 15 percent. The formula goes, the shorter the loan, the higher the rates.
  • Costs: the buck does not stop at interest rates. Other costs also make a considerable amount in the form of late fees, prepayment penalties, origination fees, service fees, etc.
  • Guarantees: As mentioned above, cash flow loans are sanctioned without keeping anything as collateral. However, lenders make it a point to sign personal guarantees from the borrowers. It obliges the applicants to pay for the loan personally if the business is in no position of repayment. Read the fine print carefully before finally submitting the personal guarantee.
  • Repayment: Most lenders prefer “full payment” of their short term loans. Though some lenders can give you multiple choices of repayment, these include loan extension, early loan repayment, or a loan refinancing with partial capital payment. Repayments can become a mounting task if you fail to pick the repayment option that does not stand in line with your cash flow. The repayment process can last from 90 days to three years.


  • Uses of short term loans

In this part, we will focus on the specific use of easy short term loans.

  • Repairs and maintenance: You can’t predict when your office computer is going to crash or when a piece of equipment stops working. To cope with these unexpected expenses, a short term loan can be a fine alternative.
  • Operational costs: Imagine your small business is cherrypicked for a big booming project, but you lack the extra staff to get on with the task. A short term loan can look after this need, and you return the borrowed money quite easily after the completion of the assignment.
  • Start-up costs: short term loans are not only reserved for existing businesses. You can consider taking a short term loan to finance start-up costs as well, mainly when you have a solid strategy for your business.
  • Account receivables and payables: By nature, some businesses are customary to the gap between account receivables and payables. In layman’s terms, this is cash coming in and cash going out. A short term loan could be your savior if you foresee the situation as temporary.
  • Choosing your loan

You can’t know which short term funding suits you the best until you know the options well enough. Here are the different types of short term loans:

  • Lines of credit: It is more or less like using a credit card. The lender sets a limit, and you can withdraw the amount as needed. At the end of the month, the borrower will have to pay the costs against the withdrawn amount.
  • Payday loans: These loans are easy to get. The biggest negative of payday loans is that borrowers must pay the full amount, along with interest on the decided repayment day.
  • Installment loans: They are known as online loans. All the process is done online and, once approved, the applicant receives a loan in his bank account.
  • Invoice financing: lenders grant loans against the unpaid invoices of customers. The time period – when invoices are going to be paid by customers – is also taken into consideration before sanctioning the fund.


Short term loans have helped many small businesses to survive and even thrive. That way, they have played a vital role in strengthening the economy of the country. In the fast-paced lifestyle of the present era, quick and easy course of the procedure makes these loans even more desirable.

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