When Covid hit, many of the short-term online lenders and merchant cash companies magically disappeared. And now, several months later, they are starting to reemerge. And with so many companies in tough spots – the temptation to take one of these loans will be high. Here, I'd like to modify Nike's famous slogan and tell business owners considering taking a short-term loan to "Just Don't Do It."
Short-term loans generally are easy to obtain. The loan process takes only a couple of days, and you can apply online. Borrowers don't need extensive credit histories or even good credit scores to be approved.
The ease of securing a loan is helpful to struggling businesses because it offers increased cash flow. That might mean making payroll or paying rent. But the price you're going to pay is a high one, in more ways than one.
The interest rate surely will be outrageous--triple figures aren't out of the question--and the repayment terms will be onerous and frequent. If your business doesn't have a regular cash flow, this can be especially problematic.
The other main problem with a short-term loan is that it can lead you into a debt cycle that you're unable to break. It's not uncommon for companies that take out a short-term loan to take out another one before the first one is paid off. That debt cycle can then become a death spiral.
So, what should my client have done instead of taking a short-term loan? I would have told him to forgo the loan and cut expenses.
Entrepreneurs are conditioned to be in growth mode perpetually, but no business grows in a straight line, and downturns are a part of the process. Hunkering down and even shrinking your company during stress points is a viable option, and it's certainly better than getting stuck in a debt cycle.