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Short Term Loans: Types and Characteristics

Mark John

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Short Term Loans Types and Characteristics

Photo by Towfiqu barbhuiya on Unsplash

Sometimes, things get thick. Getting a loan in such instances could keep you going, whether personally or as a business. Since minimal interest rates will always be a priority, getting a short-term loan will suffice. Yet, not everyone understands what short term loans Canada-based are. The following insights will help you know this better.

What is a Short Term Loan?

A short-term loan is a credit facility extended to an individual or a startup for a short period. It has to be repaid within six to 18 months, depending on the lender’s terms. Any period above 18 months is considered a medium-term or long-term loan. Remember, this loan is obtained to help support a person or business within a relatively short time.

The annual percentage rate attached to a credit facility will determine how expensive this short-term loan is. For that reason, prioritize lenders that do not charge a relatively high-interest rate. You must also opt for lenders with very few hidden charges, including refinancing options, origination fees, and other charges.

Characteristics of a Short Term Loan

Short-term loans have two main characteristics:

  • Limited repayment period: The repayment period of a short-term loan is between six and 18 months. Some lenders might also require you to pay back within 30 to 90 days, depending on the amount borrowed.
  • Small amount: Short-term loans are relatively small. The amount offered varies with the financial muscle of the borrower. However, it remains a significantly small amount, allowing you to repay faster.

Types of Short Term Loans

The types of short-term loans are defined by the source or nature of funds. These types do include the following.

Merchant Cash Advance

This is a cash advance that the borrower uses as a loan. It requires that the borrower sends a small percentage of the revenue collected to the lender. This process goes on until the entire amount gets settled.

Business Line of Credit

A business line of credit operates like a credit card. It allows a business to access a specific amount of credit, which is to be repaid within a relatively short period. At the same time, you could have access to a credit card, which helps extend the credit facility to be repaid within a short time.

Invoice Financing

This is a credit facility offered against an invoice. Here, the lender will charge a borrower interest depending on the number of days or weeks the invoice is outstanding. The goal of invoice financing is to improve the cash flow of your business.

Bank Overdraft

A bank overdraft occurs when you want to complete a transaction, but your funds are insufficient. This extra amount is given by the bank to complete the transaction. However, it attracts a relatively significant interest. That means you need to repay it within the shortest time possible.

Pay Day Loans

These are short-term loans that you’ll have to repay on your next payday. It is a personal credit facility. In conclusion, short-term loans are critical in enhancing your cash flow. However, you must choose a type of short-term loan that meets your needs.

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