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What Are The Repayment Options In Short Term Finance?

Short term financing means business loans or personal loans which have a shorter-than-average time span, i.e. very short tenure, typically one year or sometimes even less. Short Term Finance is required in a business to facilitate day-to-day operations. It usually needs a steady flow of working capital. In an ideal situation, the working capital cycle of the business runs in such a way that the necessary funds are available whenever they are required. But then, do businesses ever find themselves in ideal situations?

Ideal situations are concepts best found in textbooks. Businesses, on the other hand, operate in a practical environment where funds are always in short supply. Then how do businesses manage to procure such funds? Simple! They avail a short-term loan for their requirements.

Short-term business loans provide the much-needed business finance of a short-term nature. These loans help the businesses to meet their working capital requirements easily. So, whether a business faces a surge in demand or a slump in sale, short term loan provides the funds required to keep the business operations going.

Why are these loans preferred by businesses?

Short-term finance has various benefits and advantages which is why these loans are a preferable choice for almost all businesses. These loans provide the following benefits:

They are unsecured loans which can be availed without pledging any business asset.

These loans are easily available for businesses.

A sufficient level of term finance can be availed through short-term finance options.

The repayment options of such short-term finance are flexible and varied.

Among the other benefits, the flexible repayment options provided by short-term loans hold better attractions for the businesses. They enable the businesses to pay off the loans with utmost flexibility which does not put a strain on the regular cash-flow of businesses. So, what are such repayment options?

Listed below is the repayment options available to pay off short-term finance availed by businesses:

1. EMIs – EMIs, or Equated Monthly Instalments, are the most popular mode of repayment which is available for paying off the short-term loans. Under this option, the principal amount of the loan along with the interest component is included in one instalment which is payable every month. The EMI option of the loan repayment also has other flexible variants such as:

The Step Up EMI Plan – Under this plan, the EMIs keep increasing every month. The effect is that the loan is repaid quicker and the interest outgo is reduced. This plan of repayment is suitable for those businesses that expect a favourable revenue cycle in the near future as that would enable them to pay off the surged EMIs and reduce their loan burden. For instance, a loan of ₹ 50 lakhs is availed and is repayable within two years. The Equated Monthly Instalments might start from ₹ 1 lakh and then increase by ₹ 50,000 every month. As such, the business would be required to pay ₹ 1 lakh in the first month, ₹ 1.5 lakhs in the second month and ₹ 2 lakhs thereafter.

The Step Down EMI Plan – Under this plan, EMIs reduce as the loan tenure progresses. The borrower pays a larger part of the loan principal at the onset and then the instalments reduce over time. In the same example taken above, for a loan of ₹ 50 lakhs, if the initial EMI is ₹ 10 lakhs and then decreases by ₹ 50,000 every month, then it would be an example of this repayment plan.

Accelerated EMIs – Under this option, businesses are allowed complete flexibility in their instalment payments. If they have a surge in their cash-flow they can make an accelerated instalment payment. Thus, this plan helps businesses adjust the EMIs as per their cash-flows. So, in the above mentioned example, the business can pay ₹ 50,000, ₹ 1 lakh or ₹ 5 lakhs in any instalment based on its cash-flow.

Normal EMIs – This is the regular plan where a fixed amount of instalment is payable over a fixed tenure. Every instalment contains a part of the loan principal and a part of the interest. The instalment of ₹ 50 lakhs would have a uniform EMI which would be decided based on the interest rate charged by the lender.

Balloon repayments – Though similar to the step-up plan, balloon repayments are a little different from the step-up plan. Initially, under this repayment option, lower EMIs are paid in the starting few years. However, in the later years the instalment amounts become substantially high. The loan instalments might be ₹ 50,000 in the initial months (refer to the above example of the loan of ₹ 50 lakhs repayable in two years). But in the last few months, the monthly repayment amount might go as high as ₹ 30 lakhs.

2. Bullet Repayment – Under this repayment option only the interest portion of the loan is to be serviced every month. The actual amount of loan which is payable is paid when the tenure is over in one bullet repayment. Thus, this plan is the perfect SME loan plan in India and is good for businesses which are in their starting phase and are unable to pay the required EMIs.

3. Invoice-based repayments – This is a new short-term finance option which offers loans against the value of the borrower’s invoices. The repayments are then allowed as bullet repayments wherein only the interest is serviced throughout the loan tenure and on maturity of the tenure one payment is accepted which is equal to the principal amount of the loan.

Short term-finance is often resorted to for funding the requirements of businesses which are of a short-term nature. These requirements are often for financing the working capital of the business. With various advantages of these types of loans, the flexibility of repayment is a major highlight. With multiple repayment options available, businesses can choose any option as per their suitability and reduce the burden of repayments of their loans. 

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Nitin Arora is an experienced financial advisor who is well known for his ability to foretell the market trends as well as for his financial astuteness. He has worked extensively in the finance sector and has been dealing with the entire range of loans. He has written numerous pieces on home loans, business loans, doctor loans, EMI loans etc. and how they affect the customer in the present market scenario. He has been dealing with a host of reputed clients associated with the financial industry.

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