Where would business be today without debt? It may sound a bit ridiculous, considering almost every business in the world is most interested in making money, but without debt they probably would not be in business at all. The plain and simple truth is there are just not that many rich investors hanging around interested in taking an equity position in your company. So we must turn to debt to finance our operations in hopes of becoming profitable.
There is a variety of different debt instruments, both short term and long term, which can be used to meet our various financial needs. Since a lot of companies are in need of short term financing, lets take a look at short term loans in more detail.
Short Term Loans
Often times a short term loan will be referred to as a bridge or swing loan. In this article, we will use the phrases bridge loan and short term loan interchangeably. Bridge loans help one meet a temporary financial need. Like a bridge allows one to cross with safety to the other side of the river, a bridge loan offers you the ability to survive a shortfall of cash for a temporary period. When unexpected events result in bad times for your company, you can turn to a short term loan to assist in passing through the rough times and on to the road of recovery.
A short term loan can come in handy for much more than just a financial recession within your company. All businesses have operating capital of some kind, and many businesses rely on temporary loans to finance their operating capital needs. If the cost of equity is greater than the cost of debt, then this type of use of a short term loan is perfectly legitimate and recommended. Every intelligent business knows it is wise to finance operations with the cheapest form of capital available.
Short term loans have other particularly pertinent uses. For instance, a short term loan is often used in the real estate market as a means for providing temporary financing for real estate purchases. Some investors will prefer to take out a mortgage bridge loan on a property they are purchasing before they refinance and acquire long term financing. If a real estate investor has decided that in the near future long term rates will drop significantly, then he might take out a short term loan on the property he is purchasing and refinance when the long term rates drop. By taking out a short term loan the investor buys the flexibility he needs to get out of the loan when desired and lock in a lower long term interest rate. Thus you can see how a short term loan can make good financial sense in the real estate environment.
The realities of business necessitate the need for current debt. Fortunately for us, banks and financial institutions have designed financial products and services to fit this need. If you are interested in a short term loan visit your commercial broker today.