A short term loan is a financing that an individual or a company takes from financial institutions or other accredited credit institutions allowed by law which usually has repayment of less than a year compared to other forms of loan which may have a longer repayment period. In some cases, this kind of loans is common in the informal sector where the lender is not recognized by the lending rules and regulation but give short term loan commonly known as soft loans which are referred to loans with terms very favorable to the borrower.
The Informal Loans:
The informal loan is given by the merchants in the business sector as an emergency loan or in some instances to the individual as an emergency also can fall under the category of short term loans as at any given time, the merchants will require repayment as soon as possible. They mostly advance this credit to the borrower against collateral to ensure payment or in case of default, the collateral is forfeited.
Just in time goods:
In the modern days, a common short term loan which is very favorable to businesses dealing with just-in-time goods is customer advances where customers make an order for goods. The business people request a deposit from the buyer for goods before being delivered. This act as a short term loan from the customers where the loan offered in these case is a free interest loan. The business people use this loan to order goods from the source.
In banking industry, despite customers having debit cards commonly used to withdrawal from ATM which involves money from business transactions of individual account activities, they have introduced a credit card which unlike debit card, credit card financing is not from activities of the holder of the account but is advanced from the institution to an agreed limit and the holder of the credit card can withdrawal and repay at a later date.
Trade credit can act as a short term loan given by a supply to the distributor by giving the credit terms that is repayment period, for example, a manufacturing company can give its distributor repayment period upon an order like 30-60 days repayment period and mostly indicate a certain percentage of discount if the invoice balance is paid before the credit periods elapses. These act as an interest to the credit term advanced to the distributor and also a short term loan before the resale.
To working individuals with salary account in a bank, they are given a facility in terms of short loans called salary account. It has a characteristic of short repayment period; for example, if an employee is willing to take an advance from a bank institution and a given date with a specific month, the bank will deduct the money advanced to the account holder when the next pay reflects in their bank account. This type of loan help employed persons in case of an emergency or unavoidable crisis.
To some extent, hire purchase is a form of short term loan, and the individual is allowed to pay a certain amount of money to purchase a product of items which less than the actual price and pay the balance in agreed instalment for a specified amount of money. The actual price will be lesser compared to the price at a hire purchase thus the buyer will have to pay an interest for the short term loan. In mentioning a short term loan, it's true to say finances advanced to individuals or business from family or friend to be paid can also be classified as short loans. These advances require short period repayment.
The short loan, whether formal or informal, can be viewed as a big booster to the economy as it helps business to overcome short period finance crisis and also maintain business cash flow.