The short term finance is usually needed for less than a year mostly, and in most of the cases, it has been found that the short-term finance is sought whenever there the flow of cash is not regulated or when there have to be some seasonal investments made in the business for its enhancement.
If one prefers the short term finance over the long-term one, then there has to be some reason behind it. The first difference between both the schemes is the period of the finance. Moreover, the short-term finance helps to support the capital for a certain period but in the case of the long-term finance, the amount is used as the capital itself.
Repayment Options
There can be many repayment options for the borrower to pay back the loan and they are:
The EMI
EMI stands for the equated monthly instalments. With this option, the interest and the principle borrowed by the financial institution is calculated all together, and then the amount is paid by the borrower monthly as distributed over the period that is financed. This is preferred the most by the people who prefer the short-term finance. Following are the types of EMIs that can be preferred according to the convenience:
The Step-Up EMI Plan
This is the plan with which the EMI increases every month, and the quicker the loan is paid off the economical the whole financing becomes for the borrower. This can be the most appropriate choice for the business who can assure their success after taking the short term finance and thereby they can pay off as quickly as possible.
The Step-Down EMI Plan
At the beginning of taking the loan the person has paid the larger part of the loan, and instalments are reduced every month. Thus this is an example of the best repayment plan that can be made as this is profitable.
Accelerated EMI
This option allows the business persons to have flexibility while paying which means if they have greater amount with them then they can pay them off and accelerate the instalment payment. Thus, this can be the best option for the people who are not sure of their financial stability.
Normal EMI
The regular payment that has to be done per month or over a fixed period. The principal amount and the interest is calculated, and after that, it is divided into parts which have to be paid for the fixed period.
Bullet Payments
The interest of the loan has to be paid every month, and the actual loan is paid after the completion of the tenure for which the loan was sanctioned. This plan is preferred by almost all the business person at the beginning of the business when they are unable to pay the whole amount.
Invoice-Based Payments
The best method of the repayment of the short term finance where the borrower can loan the amount against the invoices. The interest is paid monthly as in the case of the bullet payments and the main principle amount is paid after the maturation of the term.
Short term finance is thus taken for a short period as the name suggests and they are most preferable in the case of the ones new to the world of business. They come with various advantages, but the basis of the scheme is that the repayment has to be done in a very short period and mostly before a year. This is better for the businesses where the seasonal investments have to be boosted or the business setups have to be enhanced.