Short-term business loans are loans with shorter repayment periods, typically between three and 12 months, although loans up to 24 months are available.
A short-term business loan can be a good option to cover working capital needs and short-term expenses, pay emergency costs, or take advantage of unexpected business opportunities.
How do short-term business loans work?
Short-term business loans are generally structured as a lump sum of capital to be repaid over a set period or time. These loans are usually repaid daily or weekly, meaning you end up making larger and more frequent payments than with long-term business loans.
These loans are often offered by online lenders that offer quick funding and simplified applications. Compared to banks and Small Business Administration lenders, short-term lenders usually have more flexible eligibility requirements and may work with start-ups or businesses with poor credit.
Short-term business loan interest rates
Short-term business loans generally have higher interest rates than long-term loans and traditional financing methods. Interest rates range from 10% to 99% April
Some short-term lenders use an annual percentage rate, while others offer simple or factor interest rates. You should always calculate these rates (and fees) into your APR. Doing so makes it easier to compare offers and is a great way to understand how much your loan will cost.
Types of Short-Term Business Loans
The most common types of short-term business loans are:
Business Term Loans
A business term loan is a one-time injection of capital into your business. It provides a lump sum of cash that you pay back to the lender with interest over a set period of time. Term loans can be used for a variety of purposes, including paying for short-term expenses, investing in a specific project, or making a large purchase.
Business Lines of Credit
A business line of credit gives you access to funds when your business needs them. After a lender approves a certain limit, you have the flexibility to decide when and how much money to withdraw. You make monthly payments and pay interest on the funds you withdraw. Term loans are a good option for working capital, cash flow gaps, seasonal downturns, and emergency funding.
Invoice Factoring
Invoice factoring is a financing option for B2B companies. It involves selling your unpaid invoices to a factoring company at a discount in exchange for a cash advance. The factor then assumes the responsibility of collecting payment from your customers. This can be a good option if you have a lot of cash tied up in unpaid invoices.
Merchant Cash Advance
Merchant cash advances are an option for businesses with significant debit and credit card sales. MCA companies offer upfront capital that you pay back with a percentage of your debit and credit card sales, plus fees. However, MCA APRs can be very high, so use them as a last resort.
The pros and cons of short-term business loans
Strong Points
Short-term business loans usually don't have any restrictions on how you can use them, but because these loans have a short repayment period and the funds are available quickly, they are ideal for emergency or unexpected expenses.
If you need a quick business loan, some short-term lenders can provide financing in as little as 24 hours. And compared to bank lenders, who can take weeks to process an application, short-term business loans are often funded within a few days.
Most short-term business loans are issued by online lenders and typically offer simplified applications. You can complete and submit an online application in just a few minutes, usually with minimal documentation.
Short-term lenders generally have more lenient qualification requirements than traditional business lenders. Even start-ups and businesses with poor credit may be able to get a short-term business loan.
Cons
Short-term business loans usually have higher interest rates and fees than long-term loans. For example, APRs for business bank loans range from 6.13% to 12.36%, while APRs for short-term loans range from 10% to 99%.
Short-term lenders often require daily or weekly payments instead of monthly, which means larger and more frequent payments over a short period of time. For some businesses, this payment schedule can hinder cash flow and be difficult to manage.
Even though some short-term business loans are quick and easy to qualify for, they can become a problem if you fall behind on payments. When daily or weekly payments strain your cash flow, you may feel the need to take out or refinance another loan to pay off the debt. With high interest rates and frequent payments, it can be difficult to get out of this debt cycle.
When to consider a short-term business loan
Situations where a short-term business loan may be suitable for your business needs include:
Working capital needs. Short-term business loans are a quick way to get funding that can be used to cover everyday business operations and expenses like rent, supplies, inventory, payroll, etc. These loans can be a good option for businesses that can't get traditional financing.
Unexpected business opportunities. If an unexpected business opportunity arises, a short-term loan might be a good option to help you increase revenue or reduce costs – for example, to get the capital you need to acquire new customers, hire additional staff, or take advantage of inventory discounts by buying in bulk.
Seasonal cash flow gaps. Seasonal businesses often experience a disruption in cash flow during the off-season. A short-term business loan can give you the quick access to the funds you need to stay afloat when sales slow or to cover the costs of preparing for the next season.
Emergency expenses. If you need to replace important broken equipment, a short-term loan may be a good option. These loans can help cover emergency expenses due to natural disasters, accidents, or financial hardships.
When to consider short-term business loan alternatives
In some cases, a short-term loan may not be the best option. Here are some alternative financing methods to consider.
The loan payment is too large. If the monthly payments on a short-term loan are out of your budget, a business loan with a longer repayment term may offer lower monthly payments. Long-term business loans can have terms up to 10 years, or even 25 years. However, depending on the interest rate, you may end up paying more in interest over the life of the loan.
Frequent payments disrupt your cash flow. Short-term lenders often require daily or weekly payments. If frequent payments would hinder your cash flow, consider a business credit card, which works similarly to a business line of credit and usually requires monthly payments. However, carrying a balance instead of paying it off in full each month could cost you more, depending on the interest rate the lender charges.
I can't take on any more debt. If your business isn't generating enough revenue to cover new debt payments, a business grant may be an option. Business grants don't have to be paid back, but competition for this “free money” is fierce.
You can’t meet the lender’s requirements. If you don't qualify for financing because you have a low credit score or are new to the business, consider running a crowdfunding campaign to raise funds for your business. This is a low-cost way to raise capital and gives you the opportunity to build a loyal customer base without taking on additional debt.
How to Get a Short-Term Business Loan
To get a short-term business loan, follow these steps:
1. Assess your funding needs
You need to think about how much money you need and what you want to use it for. You also need to consider what type of business loan is right for you. Common forms of short-term financing include term loans, as well as business lines of credit and invoice factoring.
Short-term business loans have frequent repayments and high interest rates, so you need to make sure your business can repay the debt you borrow.
2. Evaluate your qualifications
Short-term lenders are often flexible with their requirements for business loans, but you should understand your company's situation before applying. Many lenders use these three criteria when evaluating loan applications, so you can look at your credit score, how long you've been in business, and your annual revenue.
3. Find and compare lenders
Once you understand your financing needs and qualifications, you can research lenders to find the best option for your business.
When comparing different options, you should consider factors such as:
Providing loans.
Level of interest.
additional fee.
Repayment terms.
Speed of fundraising.
Lender's reputation.
4. Submit your application
Short-term lenders usually offer streamlined online applications that can be completed fairly quickly with minimal documentation. Business loan application requirements vary by lender, but you may be asked to submit the following:
Business and personal tax returns.
Business and personal bank statements.
Corporate financial statements, such as income statements.
Short-term lenders don't typically require physical collateral to secure a loan, but you may have to sign a personal guarantee. In some cases, the lender may also take out a general lien over your business assets.
5. Pay off your loans
Before signing a business loan agreement, compare all the loan offers you receive to ensure you get the best terms for your business. You should also thoroughly review the contract and understand the repayment terms, interest rates, and additional fees. If you have any doubts, ask the lender for clarification before signing.
FAQ
Short-term business loans are a good option for businesses that need funds to cover emergency or unexpected expenses. Businesses need to be able to make daily or weekly payments to repay the short-term loan.
Short-term loans can also be helpful for small businesses that have a hard time obtaining other types of financing, such as start-ups or businesses with poor credit.
Short-term business loans usually have repayment terms of 12 months or less, although some lenders may offer slightly longer terms, up to 18 or even 24 months.
Short-term loans are available for startups. Some lenders offer short-term business loans to startups that have been in business for at least six months, while others require at least 12 months of business operation.
