Small businesses often require short-term loans to finance the start-up period, uncertain cash-flow times, seasonal purchasing, increased marketing efforts or new ventures. If you plan and use them wisely, short-term loans can provide seamless transitions. If you use them unwisely—or when planning goes awry—they can result in financial headaches.
Usually, banks provide short-term loans as lines of credit, which offer the option of interest only with principal payoff at a specified time in the future—anywhere from 90 days to one year or more. Interest rates on lines of credit are usually adjustable, meaning that they are based on the U.S. prime rate or the London Interbank Offered Rate (LIBOR), and rise or fall with changes in these indices.
During any given 90-day period, rates seldom fluctuate enough to make a significant difference in monthly payments. On adjustable-rate loans taken out during the course of one year or more, however, monthly payments can change drastically. You should discuss at length with a loan adviser or financial consultant any details regarding interest rates, potential changes in monthly payback amounts, points and other charges, duration of the loan and additional particulars of short-term loans.