It is customary to call short-term loans, which are issued for a period of up to 1-2 years. The amount and terms of the loan are set by banks on an individual basis. When determining the interest rate, not only the financial condition and solvency of the borrower, his ability to honestly service the debt, but also the current inflation rate, as well as general trends in the country's economy are taken into account.
Short-term loans are often issued according to a simplified scheme: to obtain them, commercial organizations only need to provide a minimum package of documents to the bank. Some banks, at the stage of making a preliminary decision on granting a loan, request from companies only copies of constituent documents, the company's financial statements as of the last reporting date and copies of the passports of the manager and chief accountant, after which they offer to fill out an application for a loan.
Advantages and Disadvantages of Short-Term Loans
If a positive decision is made, the bank may request a number of additional documents to complete a short-term loan agreement, in particular, copies of existing licenses, if the company's activities are subject to licensing, and a bank card with sample signatures. In any case, the bank makes the decision to issue a loan in a very short time.
Naturally, by requesting a minimum of documents and reviewing them as quickly as possible, a credit institution cannot thoroughly study the company's financial position, which means that it assumes additional risks of non-return of funds. Therefore, short-term loans are usually issued to companies at a higher interest rate. However, such loans also have significant advantages:
- there are no penalties for early loan repayment;
- there are no additional costs to pay for insurance;
- movable property, for example, goods in circulation, can be provided as collateral.
Types of short-term loans
The most popular and expensive short-term loan is overdraft. Its peculiarity lies in the fact that the amount owed on such a loan changes daily. If there are free funds on the company's current account at the end of the operating day, the bank writes off them to pay off the principal debt. If the account balance becomes negative, the bank provides the next tranche. Thus, the balance on the current account of the company that has issued the overdraft will always be zero.
The amount of interest for using the loan is calculated monthly and is also debited from the account. Overdraft is convenient for those companies that have daily movements on their current account: they pay for raw materials and materials, and receive proceeds from sold goods and services.
An urgent loan for commercial organizations is issued for several months. Usually they are targeted and are provided for the purchase of raw materials and materials, bridging cash gaps, and so on. Often, the bank controls the process of using borrowed funds in order to minimize the risks of losing money.
Credit lines are usually opened to large borrowers. With this type of lending, funds are transferred to the client's accounts in installments (tranches), and interest on the loan is calculated and paid monthly. This is not a cheap loan, but it is convenient because money can be received and repaid within a strictly specified time frame.
