Short-term bank loans: how to use them safely

Recourse to external capital, through the application for short-term bank loans, is a condition that can occur with some frequency.

There are many reasons for an entrepreneur to seek financing, especially in those businesses where cash flow trends prove to be unbalanced.

For example: if your business allows customers to pay for products or services with long-term maturities, even though it has expenses to cover in a tight time frame, the business will often find itself in an unstable condition.

So whether it is because of a sudden reduction in revenue or the onset of impending deadlines, getting a loan is the quickest solution to solve the business liquidity crisis.

Using the obtained liquidity consciously will enable you to maintain business soundness and circumvent debt risk. How to do this? Through a Conscious management of corporate cash flow.

But let's go step by step.

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What is short-term financing?

A short-term bank loan is a business loan that must be repaid within a tight time frame, usually within 18 months from being obtained, either by installment deferment or by one-time payment.

In addition to this type of financing, there are the so-called revocable bank loans. The latter do not have a predefined maturity date, however, the bank reserves the right to demand repayment of the amounts disbursed, on short notice.

Obtaining a short-term bank loan allows you to meet your most urgent expenses without severely affecting your company's equity. But how to choose the one best suited to your needs?

How to choose the right financing for your business

There are many types of short-term financing: juggling them is not easy, especially when lack of liquidity looms large over corporate coffers. 

These include the direct bank financing are the most convenient and immediate solution. The entrepreneur has no constraints on the final destination of the disbursed portion: this means that he can use it for any business expense.

This type of loan is divided into: bank overdraft, bank advance e promissory note discount.

  1. Bank overdraft
    In this case, liquidity is disbursed directly to the bank account. Whenever, in the stipulated 18 months, the amount is fully repaid, the bank can grant the overdraft again. Thus, this is a loan that can last over time and provide liquidity with recurrence.

  2. Bank advance
    This type of loan involves the assignment by the company of securities or assets to the bank as a pledge. The amount of the loan is, in this case, bound by the value of the security or asset, which has been placed as collateral. In case of non-payment within the 18 months stipulated in the contract, the bank is authorized to auction the pledge it has received to recover the money it is owed.

Rebate of promissory note
This financing requires entrepreneurs to issue a bank subsidy, or promissory note. The promissory note must include the amount that was paid by the bank, interest and extra fees.

How to avoid taking risks

Each of the loans we have discussed, when corporate cash management is not planned, can prove dangerous for the future of the company.

Keeping an eye on business performance and regularly monitoring transactions is a good habit to optimize your company's performance and avoid being overwhelmed by debts to banking institutions: Sibill is the tool designed to help you do this in the best possible way.

Tryit now for free and reap the benefits of cash flow forecasting such as, detecting cash flow shortfalls in advance and managing short-term bank loans without taking risks.

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